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It's all about precious metals
So why does all this matter to Australian resource investors? Well investors are selling out of Euro denominated assets, and buying into 'safe assets'. This includes the US dollar (why, oh why...), along with (the much smarter choice of) precious metals.
So gold is on the move again and has hit a new nominal high of US$1242 this week. Silver is at a two year high of US$19.64, and platinum is back within a whisker of its twenty month high of US$1752.
These big jumps are a short-term reaction, but the implications of the inevitable inflation in one of the world's reserve currencies will play out for years. We have always been bullish precious metals here at Diggers and Drillers, but the ECB's recent move is a game changer. Precious metals are now looking stronger than ever.
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I would admire anyone who attempts to be bearish on precious metals at the moment, particularly at a time when the IMF is selling the rest of its 200 tons of gold. These sales historically lead to a jump in prices.
How high could gold go? We will see. QB Partners, the fund managers, had a crack at calculating its intrinsic value 18 months ago by dividing the total Fed liabilities (US$2.5 trillion) with the official amount of Fed' gold holdings (8100 tonnes).
The figure came in at US$9500!
However this figure assumes total collapse of the dollar, and reversion to the gold standard. It is a worst case scenario price. But as the currencies of the world unravel, this number may increasingly become the gold price's centre of gravity as its drawn higher.
Yet it should be pointed out that these stats are 18 months out of date, and the Fed's official liabilities are much higher now, suggesting a far higher intrinsic value. If you then use the Fed's unofficial liabilities for the calculation then you could at least add a zero to the figure!
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Rudd's shameless plunder tax (RSPT) - week two
The resource sector is still reeling from the proposed Resource Super Profits Tax, and mining executives have dug in their heels for a good fight. BHP' Marius Kloppers criticised Canberra saying the tax would threaten Australia's reputation for having a stable regime. Overseas companies such as X-Strata which employ around 5,000 people in Australia see the tax as rocking the boat. Without future certainty in the fiscal regime it is pulling out of large scale copper exploration projects in Queensland.
X-Strata's move is testament to what the industry thinks of the proposed 30% exploration credit. It's like offering you a Tim-Tam to get you to the guillotine. The global exploration budget is not unlimited and the competition between regions is fierce.
Australia's share of the global exploration budget (for non-ferrous metals) has already fallen from 18% to just 12.5% in the last ten years. This puts us behind Canada with 16%, Africa with 15%, and Latin America with 26.5%. These funds are the seeds of the resource industry. A further fall in our share of the global exploration spend now would just serve to clip the entire industry's wings for the future. The Canadians have been particularly smug about Australia's potential own-goal.
The former head of The Minerals Council of Australia, David Buckingham, reckons that Rudd government still intends to get the tax through in its current form. I still think it highly unlikely that this tax will happen, and judging by the pickup in the Metals and Mining index this week, a few others have their doubts as well. At the very least, I expect the plan will be watered down.
I'm looking out for the results of the next political poll, and expect that it will have the capacity to move the markets when it is released. This is what we saw in the UK a few months ago. When the poll correctly predicted a hung parliament, the bottom fell out of Sterling. The entire currency fell, not just the markets. If a poll shows that Rudd has indeed cooked his goose, then I think we can expect to see the resource sector benefit.
I have received many amusing emails this week getting stuck into Rudd, and unsurprisingly not one email sticking up for him. This week's winner has to be the envelope full of bizarre photocopied pictures of Kevin Rudd in 'compromising positions'. You included no details, but you know who you are!
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