Argentina Beats Vietnam for Gold Premium Title

by RJ Wilcox on July 5, 2013


Before diving into the Weekly Recap, we present an abbreviated version of our Comparative Analysis Table for your reference and ours.  It compares the operations of 12 of the top gold producers as measured by market cap.

It is a sampling of our in-house analysis, customized to capture key metrics of the gold mining business.  The complete table, available to subscribers, encompasses a long list of producers and a mountain of painstaking data gathering that we keep updated on a monthly, quarterly, and annual basis as the information is released.

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GM Proprietary Comp Table (Kitco v2)

$217 Gold Premium in Vietnam? I can beat that!

I received a real world education on inflation and the benefits of owning physical gold while living in Argentina for 9 months back in 2011.

This disheartening inflation experience came as a result of my habit of frequently dining-out at a particular small steak house, called Don Abel’s. I would go to Don’s at least once a week, always dragging someone with me because my favorite order was a dish for two.

The Lomo Maria consisted of 4 medium sized beef tenderloins smothered in a chive cream sauce, a side salad, and a plate of fries. With a bottle of good Malbec, the bill for this meal was 110 pesos, which officially at that time, was about US$24.  That’s roughly 4.6 pesos to the dollar.

During my stay, inflation, as it has so many times in the past, reared its wealth devouring head in the Argentine economy. In a vain attempt to prevent its citizens from abandoning the peso, and draining the central banks dollars reserves in the process, the President of Argentina, Cristina Kirchner, suspended the trade of pesos for dollars.

This affected many Argentines I know personally because their wages were paid in dollars.

Coincidentally, soon after the dollar trade suspension, the price for my Lomo Maria increased 20 pesos and continued to rise steadily for the duration of my stay. The last price I paid for this feast was 165 pesos (US$37), an increase in price of 50% over 9 months.

Being familiar with and interested in the monetary history of Argentina, I was cognizant of the loss in wealth headed our way. As such, I educated my friends about the benefits of gold and urged them to buy some to protect their purchasing power.

Behind a closed door in the owner’s back office of an Argentinian currency exchange house was where one could buy gold. The reason for such secrecy was because Argentinians were not allowed to exchange pesos for US dollars and of course, you need dollars to buy gold.

For an Argentine to buy gold, they first have to exchange pesos for dollars at the black market rate. At that time, it was approximately 6-to-1, pesos to the dollar. Then, after exchanging pesos for dollars, one still had to pay the premium to buy gold, which was an extra US$100 per ounce.

At the time my friend decided to buy gold, the price was about US$1,700.  If we include the premium, it cost him US$1,800 at the 6-to-1 exchange rate.  In black market terms, this fiasco cost him 10,800 pesos per ounce.  If he was allowed to purchase gold legally, it would have only cost 8,100 pesos.  That’s a premium of 25% or US$600!

Thus, although I am sympathetic to the Vietnamese having to pay a US$217 premium recently, I really feel for my Argentinian friends who face worsening currency controls, price inflation, and expensive options to protect their purchasing power!

Let’s Pull an Argentina on Iran

I highlighted a news story this week in the Gold Miners News Corner titled New Sanctions Imposed on Iran to Halt Gold Trading. Let’s steer clear of the political aspect of the story and just focus on the monetary part.

Earlier, the US sanctioned Iran by not allowing them to use the conventional banking system as a payment method for trade, mainly for the sale of oil and gas, priced in US dollars. This sanction is effectively a currency control. To get around it, Iran turned to gold, trading its oil and gas for gold with Turkey.

Then, this past Monday, the US, a little perturbed about the gold trade work-a-round, imposed further sanctions and prohibited anyone to sell or transfer gold to Iran. Foreign bullion dealers who don’t adhere to the restriction, risk expulsion from the US precious metal market, among other penalties.

Although the Argentinian currency control has different dynamics than the US imposed sanctions on Iran, my point is that when paper fails, people and governments turn to gold.

Russia and Asia are Turning to Gold

To further highlight this theme, over the past couple of weeks Russia has announced plans to establish a physical gold exchange by the end of this year and Singapore is offering the world’s first peer-to-peer bullion trading system, in a bid to become a regional gold trading hub.

In addition, UBS, Switzerland’s biggest bank, has leased vault space in Singapore to accommodate the surging storage demands coming from its wealthy Asian clients. UBS joins fellow big banks, Deutsche Bank and JP Morgan, in offering gold storage services.

This storage boom emphasizes the rapidly diminishing gold inventories held at the COMEX. As an example, US based ETF gold holdings are down an astonishing 28% year to date and large speculators on the exchange are holding one of the largest short positions ever. The speculation is that this gold is flooding into Asian hands and vaults.

Apparently, a weak gold price continues to fuel and not discourage physical demand.

Considering this week’s gold storage developments along with previous weeks comments about Russian, Chinese, Turkish and Kazakh central banks all increasing their gold purchases, the feeling that gold is starting to become the focus over its paper counterpart should be evident.

Geopolitically significant countries, like Russia and China, continue to take proactive steps to increase their gold holdings and influence in gold markets, reducing their historical subjection to the west in this important monetary arena.

So With All the Gold Bull Talk, Here is This Week’s Gold Price Recap

Gold opened at US$1,245 in New York Monday, after rallying dramatically in last Friday’s afternoon trading from $1,200 to $1,232.  The price currently sits at US$1,215.60 as I submit this week’s recap, after taking an approximate 3% drop in response to the non-farm payroll report.

It may be of importance to mention here that for the first time since the 2008 gold correction the largest holders of COMEX gold inventory, bullion banks JP Morgan, HSBC, and Scotia bank are now net long gold. Of further note, these banks have had a remarkable track record of positioning themselves to profit just ahead of major gold price reversals.

This week’s gold price suffers once again from its familiar trend and is down for the week. The graph is below.

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July 5 Weekly

The Gold Miners

Of importance this week in regards to the gold miners, was more write-down news. Several analysts anticipate that Barrick Gold will take a $4.5-$10 billion dollar write-down in Q2 stemming significantly from major cost overruns and project complications at their Pascua-Lama project which straddles the border between Argentina and Chile.

The HUI, as you can see in the chart below, was crushed. Starting at 231.12 on July 1st, it is currently at 213.12 as I submit, an 8% smash.

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July 5 HUI Weekly

Gold Creates a Currency Whipsaw for Some Miners

My final comment has to do with recent news stories coming from Australia depicting the dire state of their mining sector. As an example, I commented on the US$6 billion write-down by gold major Newcrest Mining a couple of weeks back.

Now, in contrast to this theme, I want to draw your attention to the chart below that shows the Australian dollar (AUD) versus the US dollar (USD).

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You will notice that since May, the AUD has plummeted in relation to the USD. As a reminder, mined gold is primarily bought and sold in USD. Therefore, Australian gold miners receive USD for their gold production.

However, they pay a significant amount of their costs in the local, and now much cheaper, AUD.  Thus, for Australian gold miners, a weaker AUD should translate into higher profitability for as long as the lower exchange rate persists.

It will also encourage US dollars to flow into the shares of Australian gold miners because they are now relatively cheaper than their counterparts in other countries.

Just something to keep in mind.

That’s it for now. Hope you enjoyed this week’s recap. If you want, check out our homepage: and sign-up for a free copy of our June newsletter.

Best Regards,

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