Tbilisi, Georgia

It was soul singer Edwin Starr who asked (and answered) the following rhetorical poser: “War. What is it good for?”

Starr’s conclusion was that war is good for “absolutely nothing”.If events of the past week are anything to go buy, the price of gold can be included in the all-encompassing “absolutely nothing” category. It continued to slide as Russian tanks rolled into South Ossetia, and kept going after President Medvedev called a halt to military action.

I’ve been observing events — both the war and the action on the gold market — from Tbilisi, the Georgian capital.

As the Russians advanced, frightened Georgian women were taking comfort from their jewellery boxes.

Georgians prefer the dollar to gold

No one, however, has been adding to this store of realisable wealth. Rather, the dollar is back in favour as the safe haven asset of choice. First wallets are being stuffed full with local currency to fill the car with petrol, stockpile food and for airfares (when the airport reopens). Then dollars are being stashed away for future needs.

In 2008, gold in any quantity is just too cumbersome. It is also too expensive. And too volatile! Ask any woman in Georgia’s capital, Tbilisi. First the price shot up. Now it seems to be falling at the rate of knots. This doesn’t exactly inspire confidence…

That’s why their husbands are locking dollars — and not gold — in their safe boxes.

Demand, both from jewellers and investors, has taken a hit

Outside this crisis region, where ready cash is less of a priority, others too are shunning gold. India, a gold mega consumer, has seen a heavy fall in buying. The latest World Gold Council figures show that jewellery and investment demand there dropped by a whopping 45% between April and June. Demand also fell in the other traditionally heavy gold buying areas of Turkey and the Middle East.

For weeks, Asia’s traders had been warning that the price volatility was bad for business. The price has, after all, tumbled from over $1,000 earlier in the year down to less than $800 an ounce.

Western jewellery buying has, says the World Gold Council, also fallen. This time because of threatening recession. “Deteriorating conditions in across many economies …. acted as a further barrier to spending on gold jewellery,” its latest quarterly report says.

The speculators are running scared too!

Even speculators seem to be abandoning gold (along with other commodities) amidst the dollar’s resurgence. “The speculative element is coming off,” admitted Jill Leyland, economic advisor at the Council’s London office. Hardly surprising when the Central Banks had been talking widely of selling gold to help the dollar…

In their current pessimistic frame of mind, gold bugs also fear a rise in gold output. This is despite the fact that output actually fell by 4% in the last quarter. Australia, South Africa and Indonesia all saw lower production.

More volatility ahead

Gold’s price volatility is expected to continue. Why, after all, should it be any different to all the other markets which are wildly swinging around?

Barclays Capital’s precious metals analyst, Suki Cooper, puts the price range for the rest of this year and 2009 at $800-900.

The scaremongers are not yet predicting the big doom scenarios — a collapse to 2007’s $600 an ounce, or even 1999’s $250. But investors remember those levels. They know how bad it could get…

One thing we can be sure of — it’ll be a bumpy ride. Keep your courage!

Erin Hamilton

Source: Why Gold Investors Are In For A Bumpy Ride

We think it must be the “better to push on an opening door” syndrome!

The miners are being outshone by the metals themselves. Yet mining shares continue to outperform the general market. The FTSE Global Mining Index was up 10% in the first half, compared to a 13% decline in the FTSE Global All-cap Index.

Miners of gold, however, have not been among the best performers… yet!

Still if these forecasts materialise, the worst could be over for some. Take Randgold Resources (NASDAQ:GOLD), a mid-tier explorer, developer and — importantly — producer in Africa.

Randgold first roused our interest back in July 2007 when the share price hovered around R12. By April 2007 it reached R28 — a gain of more than 130%!

But then, it all started to go wrong…

Then the slide began, as a result of cost and production fears. More than a third of its value was wiped out, along with other mid-tiers.

But Randgold still has all the ingredients for success. Chief executive Mark Bristow is not deterred by a market driven “purely by instant gratification”. He is going for continued “organic” growth. That means Randgold finding its “own gold, so we’re not forced to buy ounces at a premium by the demands of a bull market.”

Hitting its targets by 2011 will increase attributable annual production from Randgold’s West African mines by 50%. The figure will be a whopping 600,000 oz.

Randgold has great key objectives — to make falling output and ore grades a thing of the past and to aggressively tackle soaring costs. It may have raked in higher gold prices this quarter, but cash costs were up 47%.

In spite of that, net profits still rose 42%. And the production pipeline holds promise. Two existing open pit operations have just produced 63,249oz at a cost of $470/oz . They are on target to deliver 265,000oz this year. A new high grade underground mine has started to deliver, too. By 2010 it will be producing 400,000 oz — result! Another is in the final planning stages.

Randgold has its fingers in plenty of pies

Its project in the Ivory Coast is enjoying a “steady improvement in the political climate”. Randgold has also recently announced a 52% increase in the more reliable “probable” reserves category.

In a world where production is falling, new deposits are crucial. Randgold has a good track record here. In Tanzania, it has decided to enter phase two of the 500,000 oz joint venture with AIM-listed African Eagle (LON:AFE). A geological model has given good reason to do so.

All in all, Randgold’s net profits could increase by as much as 70% this year, Bristow reckons. Not bad!

And it is scanning the horizon for more! Africa may be Randgold’s “home-turf”, but it is not averse to taking its skills elsewhere to new and profitable gold targets.

So, keep mining,

Erin and Isabel

Source: Randgold Still Has the Ingredients for Success

A load of performance tables have just been published. On average the last 12 months has seen tier 1 gold companies shed 20% of their stock market values. And even a safe bet like big boy BHP Billiton has lost 16%.

A warning comes from international consultant Pricewaterhouse Coopers. In its latest mining report it says earnings overall in the sector may have peaked. Revenue for the top 40 companies might have grown 32% last year, but cost rises of 30% are up with that.

Mining houses are having to absorb many of their costs. Net result? The “boom cycle may make way for a bust cycle”, says top South African analyst Gary Quinn. He works at Prudential Portfolio Managers, one of South Africa’s leading investment houses.

Of course, the current, much-publicised supply shortages are a factor in rising prices. But that is not much good to the miners when costs are going through the roof. The inevitable result is lower earnings. Quinn has just published his sums. They show that earnings for South Africa’s miners could be flat through all of 2009.

The gloom is global! Investors have been selling off big time – even the usually acquisitive Russians! Much is being made of the sale by Suleyman Kerimov (35th on Forbes’s rich list) of his stake in Russia’s top silver producer, Polymetal.

Kerimov got out at a 30% premium to the then market price. But traders are reading his move as a clear indication that this sage investor thinks that silver and gold valuations have peaked. And he is not alone.

Unsurprisingly, South African mining shares have been hammered hardest. Boards there are having to deal with a ghastly range of value-destroyers. There are labour issues, safety issues, power issues and the longer term concern that gold yields are declining. These have slumped over 25% since 1999. Miners have had to seek gold at deeper and deeper levels and at a much higher cost.

Take Gold Fields, one of the world’s largest producers of gold. Given the high gold price, now hovering around the $900 mark, one would have thought markets would be moving in this tier 1 producer’s favour. Wrong! In fact Gold Fields’ share price has nearly reached 12 month lows.

Other South African based companies haven’t fared too well, either. AngloGold Ashanti is some 36% off its 12 month high. Harmony, South Africa’s third biggest producer, is down 27%.

Further down the chain, tier 2 producers are more than 30% off the 12 month weighted average. Even an old market favourite — RandGold Resources — has taken a pounding in recent weeks. It has lost a whopping one third of its market value in just three months.

RandGold management says that is down to the fall in gold bullion prices earlier this year. That and — surprise surprise — the cost of energy!

Randgold’s key operations in Mali, Loulo and Morila, depend on diesel power. So, in spite of producing more, Randgold’s profits fell 10% compared to last year’s figures. Management also blames the weak dollar and increased costs of royalty payments.

Total despair? No. We remain optimistic. Along with the likes of resources bank Macquarie, we believe the key is to be selective. We are taking out our calculators to search for low cost producers.

Macquarie has done some of the work for us, highlighting Goldcorp, Agnico-Eagle and Yamana. Goldcorp maintained the lowest costs among senior miners at $240 per ounce of gold. That compared to the overall top gold producers’ average of $385/oz!

So keep looking,

Erin and Isabel

Source: Investing In Gold Miners? Be Selective – And Look at Those Costs!

Is it true that De Beers pulled off one of the one successful pieces of social engineering ever? If they did manage it, you can’t deny that it was one of the most remunerative schemes ever hatched! For sure it persuaded all of us (with a little help from Marilyn Monroe) that love, courtship and weddings mean diamonds. From being a loss-making over-supplied product, diamonds were transformed into a product that brought in billions of dollars. So could this be done with other gemstones? Miners have at least 130 more to choose from.

There is a lot of money riding on that question. Diamonds, emeralds, rubies and sapphires are “precious” – they are the pricey classics. Few doubt that. They have “lasting appeal and distinguished history”, says the International Colored Gemstone Association in the US.

Prices give the rankings. Diamonds generally come top. Ruby and emerald are also priced higher than a top quality sapphire, due to their rarity. For a one-carat ruby stone the bill is likely to be between $250 and $10,000 per carat. Truly quality gems will cost more.

What hope of using De Beers’ tricks for any of those other 130? Miners are always on the look-out for new money raisers. Plus, given quantities are often too small for the mega miners this can be rewarding territory for the minnows.

Rising stars of gemstone jewellery are, apparently, tanzanite, tourmaline, aquamarine, imperial topaz, and tsavorite garnet. Gems in this category sell at between $50 and $1,000 per carat for an average-to-good quality one-carat stone. Larger stones go for more. For example, large examples of tsavorite – can easily reach $3,000 per carat.

There is another category – connoisseur gems. These have a more specialized market because they are rarer. Here are all sorts of marvellous names – black opal, jadeite, pink topaz, chrysoberyl cat’s-eye, fancy coloured sapphires, and even rarer stones like demantoid garnet and alexandrite. The lists give prices ranging from $250 to $5,000 per carat. Yet top quality alexandrite with a good colour change regularly command at least $10,000, even in a one-carat size.

Collector’s gems include spinel, zircon, moonstone, morganite and other beryls, and many even rarer ones. They are little-hyped as they are not many around to make marketing worthwhile. Red and hot pink spinels can command a few thousand per carat, but most of the gems in this category will sell for hundreds, not thousands.

Lastly, well inside present budgets, there are the affordable old favourites and some new gems. These are amethyst, white opal, citrine, ametrine, peridot, rhodolite garnet, blue topaz, iolite, chrome diopside, kunzite, andalusite, and many ornamental gemstones such as lapis lazuli, turquoise, onyx, chrysoprase, nephrite jade, and amber. Prices for these gemstones range between $5 and $100 per carat for a one-carat stone.

Of course, it’s questionable whether risking money on an obscure mineral as recession looms is a good idea. Better go for diamonds? Not necessarily! The trade fears a collapse after sharp rises in prices of large stones. Fuelling the market are stock-piling insiders. To them it seems the best haven, as the financial news grows ever direr, are diamonds.

A warning has come from right at the centre of the trade – from America’s maverick diamond trader Martin Rapaport. “Higher prices brought about by internal diamond industry speculation are not sustainable and may result in significant financial loss,” he says.

And added: “If a significant component of the price level is based upon internal diamond industry speculation that prices will continue to rise, then even a slight short-term decline could cause a collapse.”

So, there is nothing wrong with checking for winners among the lesser gems. That is certainly the view of one of London’s most successful investors – Dr. Graham Birch who heads BlackRock’s Merrill Lynch natural resources team.

Tucked away in his World Mining Trust portfolio is a little £50m AIM stock – Noventa. It makes up just 0.2% of his £1.2bn portfolio. It might be worth looking further into, though, given it’s been picked by a manager whose fund’s share price has risen by 421% over the last five years, 185% in the last two.

One gem Noventa produces from its Mozambique mines is morganite. This is a rare pink beryl gemstone. It’s from the same family as emerald and aquamarine. There is an exclusive joint venture with NASDAQ-quoted jewellery manufacturer LJI, whose retail jewellery chains span across China. Noventa sells its rough morganite at $1,670 a kilo to LJI, and gets 49% of any jewellery sales profits on top of that.

And as a hedge for its jewellery business Noventa also mines tantalite. Key use of this rare stone is in capacitors for electronics and mobiles. Supply/demand balance is forecast to slip into deficit. Top of the pops rating comes from the fact that the US Defence National Stockpile Centre exhausted its inventories in 2006.

Another little AIM gemstone miner is TanzaniteOne. This one mines the gloriously blue tanzanite in, of course, Tanzania, but also mines tsavorite. Fascinating company this but, by the way, the share price is heading south; it seems investors don’t like the latest news. It cannot be the figures – they show some good rises. One can only deduce that perhaps they don’t like the latest change to local management. A bit of resource nationalism going on here?

TanzaniteOne practically invented tanzanite. Discovered only forty or so years ago, it was not really marketed until the 1990s. The amazing thing about gemstones is that a number of others have equally short histories. Seems we are all suckers for a new pretty face – though the face of this brilliant blue stone has to be heated to 450 degrees to develop its colour.

The disadvantage to these new stones is that they carry no myths or magic. Key to their success is the way De Beers played diamonds – marketing. It can be done! Tanzanite became popular following marketing by legendry New York jeweller Tiffany. In 2002 the stone was added to its lists by Jewellers of America as one of the December birthstones.

Erin Hamilton and Isabel Turner
For The Daily Reckoning