Lawrie Williams: Making sense of gold boom – how to play it from here

Veteran editor Lawrie Williams has been involved in the mining sector all his career, studying it, practicing as an engineer and then switching almost half a century back to reporting on it. There are none better positioned anywhere to help us understand the sudden rebound of the gold price.’s Alec Hogg met up with Williams in a London apartment to talk about gold, mining and how to play the bullion wave – already up 25% in dollar terms this year.

I’m in London with Lawrie Williams the doyen of Mining Editors around the world, an old colleague from many years back but I’ve never asked you this question before. Lawrie what attracted you to mining in the first place?

Well it was when I was scratching around for a career when I was in my last couple of years at school and mining just struck me as being something interesting. It was something which was going to take me overseas which you know, I suppose for a 17 year old is actually quite exciting. So yes, I interviewed at a couple of universities, was accepted by both, went to the Royal School of Mines in London, and took it from there. I went and worked in South Africa, I’ve worked in Zambia, and I’ve worked in Canada.

You worked as a mining engineer?

Yes and I did a little bit of mining analysis in South Africa as well for one of the big mining companies and then I was offered a job back here as Financial Editor of Mining Journal. I think at the time I was a little bit unhappy with South African politics and the way they appeared to be going.

When was this?

1970, and took up a job as Financial Editor of Mining Journal and really, that’s when I got involved with writing and been involved in that ever since.

So it’s almost 50 years as a journalist but with the right kind of background. Do you think it’s important that people have an understanding before they tackle a subject as complex as mining?

It helps, but then you know a lot of what happens with mining relates to things that aren’t necessarily technical, so I mean it’s quite useful to have a technical background to understand the mining companies but of course much of what you’re looking at is metal prices, which you don’t really get training for that in the mining sector. So that you have to assimilate over the years and I suppose in other ways for somebody writing about mining companies they can also assimilate and it’s remarkable how quickly some people pick up the reigns in this respect. Others find it totally impossible.

It’s a difficult sector, it’s cyclical.

Yes, it’s very difficult. I mean, I’ve been through probably three up and down cycles, particularly with base metals and with gold. I started writing about mining and gold when gold was at $35 an ounce and was sort of fixed at that level and of course it soared to over $800 once Nixon took American off any kind of gold standard and then it dropped back down into the two hundreds and then recently we’ve seen huge changes in the gold mining sector.

That’s really the point of this discussion, the way the gold price has been moving this year in particular. At one point in time a few years ago it was at $1 800 an ounce. It looked like it was going through $2000 easily. It came all the way back, then it appeared as though it was dead but it’s made a remarkable recovery. What’s happening?

Well, I think the fundamentals have changed and a lot of it relates to sentiment in the investment markets and I think a lot of people wanted to talk the whole… down because it didn’t suit them for it going higher. The conspiracy theorists out there will tell you that it’s actually a sort of governments which are trying to suppress gold because it makes the… particularly the US fed because it makes the Dollar a rise in the gold price is effectively a valuation of the US Dollar and they don’t like to see that. Now whether that’s true or not I really don’t know. Some people will be adamant that yes, there is manipulation in the gold market, which is government related. Others will say no, not at all and there are probably elements of truth in it but perhaps not total manipulation anyway.

This last run since the beginning of the year, 2016, we’re halfway through, it’s up 25 percent in US Dollar terms, even more in Pound terms after the decline in the Pound recently, so fortunes have been made. How can one explain what has happened?

It’s very difficult to explain exactly what’s happened this year because it literally started on January the 4th when the markets opened and it really hasn’t looked back since and why January the 4th should be the trigger, heaven knows. The fundamentals are relatively good. The mining companies are beginning to… they’ve probably peaked. The gold production has probably peaked or it’s getting pretty close to peaking while demand has been particularly strong in Asia.

Although this year demand has fallen off in Asia, it’s been replaced by Western demand in terms of gold ETF’s and buying bullion, I suppose as much as anything else but the demand is strong. There is the belief that gold production is dropping. Scrap sales have been down because they’ve been very high earlier and a lot of the potential scrap has gone out of the market and it looks like we’re moving into a deficit situation in terms of supply against demand. Whether that’s sufficient to keep the gold price moving up I really don’t know but at the moment there also appears to be a potential shortage of bullion.

That’s actual bullion, actual metal?

Yes, I’ve seen some very, very strange things happening recently and the one which I pick up on are the Swiss gold imports and exports. Traditionally Switzerland’s imported gold from the UK because the UK is the sort of centre of gold trade and exported it to China and India and the Middle East. So far this year the reverse has been happening. Switzerland is no longer importing gold from the UK. In fact, the UK is now the biggest source of Swiss gold exports, which suggests that the UK vaults are not carrying enough gold to meet demand in full and I’m sure this is having a particularly good effect on the gold price.

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The other thing is places like Hong Kong and Dubai are exporting gold back into Switzerland and we hear anecdotal evidence from the Swiss refiners that sourcing gold is actually becoming increasingly difficult and in parallel with this it appears that the amount of available sort of non-attributable gold on warehouse stock say on Comax in the United States is also coming right down. So there does seem to be something of a potential supply squeeze out there.

They’re not making any more of the stuff and the stuff that they are getting out of the ground is becoming increasingly difficult.

Yes, that’s the state of things and the other problem, I suppose is the big fall in the gold price over the last four years up until this year, well this last five years actually almost, has meant that the mining companies have actually been cutting back capital expenditure. They’ve been cutting back exploration, so there are no gold finds out there. So future supplies look as though they’re going to be diminishing over the years and it’ll take quite a long time to turn that around and by the nature of things what is being found tends to be of low grades and require higher capital expenditure levels to actually exploit.

Companies are cutting back on their capital expenditure because they all got burnt. So the banks aren’t keen to lend huge sums of money because a big new mine like the proposed Pascua Lama Development which Barrick has been having so many problems with is a multi-billion Dollar project. At the moment that’s on hold and there are other large projects which are on hold, they’re not going ahead at the moment. The pipeline is coming back, there isn’t sufficient gold sitting out there I suppose.

Supply is tight but who is doing the buying?

At the moment the biggest buyers appear to be the gold ETF’s which leaked gold. One of the big problems with the gold price and driving the gold price down in 2012 to 2014 and even last year was sales out of the gold ETF’s which had really peaked along with the gold price back in 2011, so an awful lot of gold came out of the ETF’s which was adding to the supply and the price came down. At the moment it appears to be flowing back into the ETF’s and consequently the prices are rising.

The biggest American gold ETF’s, the SPDR gold shares, I think that’s put on over 300 tons of gold so far this year which is more than even areas like, you know people like the central banks are buying. Central banks are supposedly buying, although I’m not sure that, that’s actually continuing at the moment because the latest month that it goes out of China and Russia which were really the two primary central bank buyers. China bought none in May and Russia only bought three tons.

So it’s the private investor, it’s the individual who is panicking because gold is a reflection perhaps of insurance.

Oh, very much so. What has happened, people are nervous about the continuing growth of the stock markets. They’re being told by an awful lot of, I suppose people were very good economic records, so “We’re due for as crash, we’re due for a crash”. Yes, gold is the sort of ultimate safe haven in a case like this, so you know that’s obviously had an impact and people have been buying in gold coins, gold bars, the main mints are around the world. The US Mint, the Royal Canadian Mint, the Australian or the Perth mint, I believe and the Royal Mint here in the UK have all been seeing huge demand for small amounts of gold for individual investors as well as bar and I suppose investment in gold bars from people who have a lot of money.

People are using gold as insurance, very much so and I’ve now got to bring back the whole Brexit situation. One of the things we recommended quite strongly ahead of Brexit because I was never totally convinced that Remain was going to win. I personally voted to remain but it struck me that there was this huge underswell of anti-EU feeling in the UK and so on my own site actually said it was a no-brainer to go out and buy some gold ahead of a possible Brexit because if Brexit was going to happen then the Pound was going to fall which we’ve seen and the gold price would probably go up and the combination yes, would mean good profits for people who had done that.

Did you do it yourself?

I have my pension fund. It has a fair amount of BlackRock Gold Fund and gold in general in there.

All right, so this time the shoemaker did actually fix his own shoes first?

Yes, well I mean this is going back in time but I didn’t do more. The frustrating things was in a way I was looking to do it but then travelled overseas and sort of missed the opportunity to actually go in and buy some more, which I probably should have done.

Lawrie, you’ve been around in this industry following gold markets for almost half a century. Is there any other time that this reminds you of what you’re seeing right now, mood-wise, demand-wise if you cast your mind back?

The only thing where you can see a parallel is back to the time when gold went up to $800 back in the seventies but I wasn’t really so involved in gold per se at that time. I was just really involved in writing about mining back then and that was just something which was on the side. I wasn’t immersed in the gold market. It’s only really probably the last ten years or so I’ve been much more immersed in the gold sector.

Now you’re writing your own blog, “Lawrie on Gold” and writing for various people around the world and focusing most of your attention on the yellow metal.

Yes, well on precious metals in general. I’ve written a fair amount about silver which of course you know, people have said that silver is like gold on steroids when gold’s going up, silver should go up faster. Well actually this year I think probably some of the silver investors were quite disappointed up until about the last week or two when silver suddenly just took off. There’s been an incredible rise in silver price. Gold’s up I think 24 percent so far this year, silver’s up over 40 percent.

Is that too much, where are you seeing the next move?

I think one has to be a little bit worried that silver moved too far too fast vis-a-vis gold, now if gold continues to rise then silver will probably pick up again. We’ve seen a bit of a pullback today on silver I think or yesterday and today, but not that serious and one of the things people watch is the gold/silver ration, how high the number of ounces of silver it takes to buy and ounce of gold and that had been running very high. It wasn’t earlier in the year; it was running at about 83 when it’s now down to below 70, so you know that’s a really good indicator of the balance of interest in silver as against gold at the moment.

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You haven’t mentioned gold mining shares and particularly South African gold mining shares. Are you far away from those?

A little bit away from the South African gold mining shares, although Harmony, I think being a marginal is up about 300% this year, which is pretty good record. Even Anglo Gold’s up around 150 percent.

So that leverage to the gold price remains, but I guess the risk as well.

Yes, well this is the whole thing. The gold stocks which have done best are the ones which are really in recovery or are marginals and the trouble with marginals in particular is that if the price slips then they crash, if the price continues to rise they’ll continue to do well.

For the risk adverse investor who believes that gold will continue this run that might be a place to put some money but probably not yours.

No, it’s still a risky end of the business. I mean there are safer ways to go and invest in gold. I would recommend probably the streaming or royalty companies for instance, all of which have done pretty well this year. I mean royal gold out of the states has doubled in value and it’s a much safer investment than say in gold stocks because they don’t have any of the direct mining risks themselves. Silver Wheaton has done roughly the same, Franco-Nevada is up about 60 percent this year and you know those are safe bets but it’s interesting too that if the gold stocks which don’t appear to have done quite so well, they’re the stronger gold stocks, the ones which have been showing good performance, but what happened was they weren’t oversold to the extent that some of the others were.

So the question of being oversold not just for the stocks but for gold itself, do you think we’re now getting to a point where people will get sucked into this market given that gold is still at $1350, quite some way from that $1800 record?

Yes, well this is all a case of momentum, isn’t it and yes, I think some people will get, there are always people who get sucked in on what they are told is a good thing and there are plenty of people out there telling you that gold is a good thing or silver is a good thing. Yes, but they usually have their own agendas on this, so you know one has to be a little bit careful.

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