Newsletter #11 March 2008
In this edition:
The Gold Price
Coming Events
The Gold Price
What’s topical on the Coast, the country and the planet – the price of gold.
Where is it going and why, does it affect us; it’s all tied up with human nature, how we deal with risk, certainty, and ‘storing for winter’. What’s sub-prime got to do with us?
On 14 March 2008 the spot price of gold surged above the US$1000 level in early morning trading in New York and reached a record price of US$1,033.90 on St Patrick’s Day. The gold price has moved above that level in the futures trading market. What’s driving the gold price and how does what homeowners in the USA are doing directly affect all of us in New Zealand?
The purchasing power of the American dollar is falling rapidly. The ‘sub-prime mortgage crisis’ has resulted in a sharp increase in home foreclosures, that started late in 2006, causing uncertainty in the minds of analysts and precipitating the current global financial concerns. This series of events started because a lot of people with lower incomes or a less attractive credit history than the 'prime' borrowers were being given mortgages at sub-prime (marginally higher) rates because of the borrowers less favourable credit history or poorer asset base. A sub-prime loan is riskier for the lender as there is less certainty of the loan being repaid.
Because in the US it was very easy to get such a loan there was a big increase in demand for houses. Home ownership peaked in the US in 2004 at 69%. In the US house prices started going up in the early and mid-1990s. With sub prime rates being not that much higher then the prime rate, people were encouraged by the institutions who lend money to take out these mortgages with the intent of refinancing later at better terms.
Easier access to finance meant more houses were built, so many, that initially the housing market started to plateau. When even more houses came on the market and supply outstripped demand the price of houses declined.
We all understand that it is really difficult to refinance your house when it has reduced in value. At the same time with the demand for all commodities rising globally in response to the “Chindia” effect, life around us is getting more expensive. So, we now have the situation where people are borrowing money at a higher rate than anticipated because they have a sub-prime loan that cannot be refinanced as expected because the value of their house has reduced and consequently they can no longer meet their interest and loan repayments.
Mortgagee sales follow. But the big money lenders have lent so much money to sub-prime borrowers that by the time they sell the property against which the loan was secured they are making huge losses. Remember that the housing market had collapsed. The majority of mortgage lenders have passed on the right of mortgage payments to third-party investors. So a lot of banks and companies worldwide are facing losses, as the value of the underlying mortgage assets has declined. Stock markets are reacting severely to this and are very volatile as the uncertainty persists. They have declined significantly in many countries.
So what do we do? We buy gold instead – the age-old safe haven for wealth that has endured from the times of the ancient Egyptians.
The US is the world’s largest economy and is heavily geared to consumerism. People have less money to spend, the economy is being put under huge pressure. The residential mortgage rates offered to refinance go up as lenders try to reduce their losses. It is now time for the US legislators and the Treasury Department to take action and for the US Federal Reserve to cut interest rates to stimulate the economy. It is easier to lend and hence easier to spend. As this happens more and more 'surprise' collapses of financial institutions are happening as the rot that was established some time ago finally catches up. There is a big fear in the market, who will be next … and the spiral goes on and on.
As the interest rate goes down less people will invest in USDs as they can get a bigger bang for their buck (‘leverage’ to use a financial term) investing their money in other currencies such as the yen or Euro, or any other internationally tradeable commodity, especially gold. Many countries have a lot of American dollars that they might not necessarily want to keep as they can buy less and less with that dollar. They also will look towards buying other currencies and gold. So more American dollars are being dumped on money markets and its value is decreasing and more gold is being bought and its value is increasing – simple supply and demand stuff.
Which is where we came in, the more people who buy gold, the higher the price. Where will it go; who knows as it is all dependent upon the foibles of human nature. Does it affect the West Coast? Probably. How? We will have to wait and see.
What’s new?
The Minerals Programme for Minerals (other than coal and petroleum) 1996 and the Minerals programme for Coal 1996 have been replaced by one document. Tenement Consultant Vivienne Bull has compared the two documents. You can download a PDF from this website.
Coming Events
See the gold in them thar hills.
A chance to check out the Coast’s newest gold mine.
Oceana Reefton Operations and Minerals West Coast in association with Green Kiwi Tours offer locals the chance of a guided visit to Globe Progress in mid April.
Contact MWC if you are interested
Cost: $15 per person.
Electricity: Efficiency and Management Seminar
Early June
Details to follow
Minerals West Coast Annual Forum 2008
Hokitika
Climate, Carbon and Change – the challenges of.
Early July
Details to follow
Keith Brodie
MWCT Project Coordinator