August 2010


The currency of gold: Steady growth the standard for gold producers

By D. Zlotnikov

Last year IAMGOLD increased its interest in the Sadiola mine in Mali to 41 per cent

Read between the lines of a chart following record high gold prices over the last few years and you will find a number of other stories: the subprime mortgage debacle and subsequent credit crisis, fears over Europe’s deficit-ridden economies, high unemployment in the United States. With each peak, the ascending value is all the reminder you need of the role gold has traditionally played: a hedge against financial turmoil.

The ongoing financial tumult is a powerful motivation for people to continue buying gold, says Charles Oliver, senior fund manager at Sprott Asset Management. Combine that with the dramatic growth of the US monetary base — i.e the printing of US dollars — and Oliver expects to see prices reach the US$2000 mark within two years.

The reasons for Oliver’s high hopes for gold and, by extension, low expectations for developed nations’ economies, are numerous. To start with, despite the financial stimulus package, the US has lost eight million jobs over the past four years, and Oliver does not expect this to be reversed any time soon. Worse yet, he points out, much of the program aimed at tackling unemployment was funded with borrowed money, increasing the government’s debt load and interest payments. As the economy recovers and the Federal Reserve raises interest rates, more and more money will have to be spent on servicing this debt. The situation is similar in Europe, and not just in heavily indebted countries like Greece and Ireland. And as recent events have shown, when one country in the eurozone suffers, the pain is shared by all the others.

Nor is the US out of the fire, says Oliver, pointing out that while there has been extensive coverage of the European deficits, the current situation in the United States has been largely ignored. “I’m shocked it hasn’t hit the same sort of front-page headlines,” he says. “If you look at the US, they’re going to run a deficit this year of around $1.6 trillion. Their GDP is US$14 trillion. Hey, guess what – their debt to GDP ratio is over 10 per cent too!”

Social forces

Making things even worse, Oliver warns, is the looming exit of baby boomers from the workforce, ending a big source of tax revenue. “In 2010 the first baby boomers turn 65. When they’re 64, they’re at their peak earning and they’re paying peak taxes. Once they turn 65 and retire, those peak tax levels turn into very minimal amounts,” Oliver explains.

Another problem with aging boomers is they tend to use the healthcare system a lot. According to the US Congressional Budget Office, healthcare costs are expected to go from roughly US$800 billion to US$1.6 trillion per year in the next decade. “That’s adding another five per cent deficit to GDP right there,” he says.

All of this means the financial pains of the world’s largest economies are likely to continue for the foreseeable future. This will keep people looking for alternative, more stable, investment vehicles: hard assets of all types – and Oliver is bullish on those as well – but given that gold has served the role of capital preservation tool for 2,000 years and more, Oliver expects more people than ever before will turn to it this time.

In fact, Oliver suggests that US$2,000 an ounce is nowhere near the top range for gold. “I think gold may go beyond US$5,000,” he says. “I don’t know how far it will go; it all depends on the governments of this world drastically cutting their spending, and at this point in time I don’t see them being responsible and doing the right thing.”

The bright side of the coin

The dreary financial situation means it is a bad time to be a Greek government employee, but an excellent time to be a gold producer. A number of Canadian operators agree. Underground operator Kirkland Lake Gold is now completing the first phase of its 36-month, two-phase mine expansion, which will allow the company to move from its current production levels of 50,000 ounces per year to between 90,000 and 100,000 ounces this fiscal year. The second phase, says director of investor relations Lindsay Carpenter, will roughly double that figure again, with a fiscal year 2013 target of 180,000 to 200,000 ounces a year. And, she adds, the mine expansion program is currently proceeding ahead of schedule.

Mid-tier operator IAMGOLD, with eight gold producing mines, has also been growing. Despite having reached the end-of-life stage at two mines in the past two years, the company has maintained its nearly one-million ounce production levels by completing a major expansion and introducing significant operational enhancements at its Rosebel Mine in Suriname. That mine’s 2010 attributable production is expected to exceed 380,000 ounces. The company’s newest mine, Essakane, has just been commissioned and is expected to produce more than 500,000 ounces over the next 18 months.

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