British broadsheet newspaper The Daily Telegraph recently illustrated the supply market risks facing any significant user of gold, quoting Kevin McArther, chief executive of GoldCorps. We won’t build a mine where we won’t go on holiday, he says of mining investments. The Daily Telegraph noted that the world’s reserves of gold are dwindling fast. At the same time, demand is rising. In addition to its obvious uses in jewelery, gold is a key component in PCBs and other high performance electronic circuitry due to its unique conducting properties. Miners, however, are failing to invest in new facilities because so much of the probable reserves exist in countries run by demagogues or serial expropriators, including areas in South America, Russia, and many parts of Africa. Gold production in South Africa is down to its lowest level since 1932, while production costs are at their highest level ever. So with a tight supply market, world credit instability, and political uncertainty, it’s probable that gold will continue to attract buying interest and see long term price support. Allowing for inflation, gold would have to reach $2,500/ounce to match the last peak in 1980, meaning that the current level of $800+ may not be as unrealistic as we would immediately think. We would already expect miners to talk up the market, but when investment analysts join in, we should take notice. Following a correction between now and the end of the year prices in excess of $900/ounce are being touted for first quarter 2008 and even over $1000/ounce as the year unfolds. With oil at $80+/barrel, both resins and gold are likely to remain high for the foreseeable future. For the PCB makers, then, there is no relief in sight.

–Stuart Burns

 

Almost everyone knows the age-old adage, Buy Low, Sell High, with the possible exception of a scoundrel trader for whom I used to work. He practiced a Buy low, but do whatever you need to sell strategy. Although buying low and selling high is a rather duh concept, I always get a kick out of hearing how XYZ company offloaded some old nickel or copper they purchased before the markets went crazy. So this article suggesting that now might be a good time to sell off gold jewelry purchased several years ago made me chuckle. Playing the price arbitrage game can work for buyers and sellers of all sizes.

I once met with the VP of global purchasing for a middle market manufacturing group who suggested that metals prices (we’re talking about the raw materials here) are similar throughout the world. But this couldn’t be any further from the truth. In fact, the arbitrage opportunities for buyers are probably more abundant as commodity volatility increases. Simply put, the more the prices for metals gyrate, the greater the opportunity to take advantage of arbitrage. Perhaps we can find an academic who would be willing to run some regression analysis for us to confirm that last statement. As an example, if the market is going down and a domestic supplier sets his price using a trailing three-month average, while a Chinese producer is using a spot price to set his price, a buyer can take advantage of an arbitrage opportunity (provided the product does not involve complicated tooling or high switching costs). Of course, there are many other variables, including the buyer’s required lead time, quality requirements, etc., but if the purchasing organization develops and creates multiple supply options for a particular category, there could be some savings or cost avoidance opportunities.

In the meantime, it is tempting to consider a little profit from those old gold necklaces!

–Lisa Reisman