Gold News

Gold rises in Asia but gold mining firms pay much more

How much should you pay for an ounce of gold today?

You can check the live "spot" price on BullionVault's charts, of course. But instead of $612, how about $750...or $963...or $992 per oz instead?

That's how much some gold mining companies paid last year. 2006 saw the hottest gold mining M&A market ever. Key assets went for a premium over the gold price.

Mergers & acquisition in the sector totalled $19.3 billion in 2006, says a review published by Merrill Lynch – three times the value of gold mining M&A in 2003.

Merrills spotted 31 big-money deals in the global gold industry, up from 23 the previous year and twice the number in 2004. “The driving factor for this spurt of acquisition activity has been the need to replace reserves mined in 2006,” say the analysts, Michael Jalonen and Anita Soni.

Overall the average deal price per ounce of gold in reserves was at 0.6% over the gold price. For development projects, way off producing any gold yet, acquiring firms got an average discount of 33% per ounce.

No discount on gold however for Japanese buyers today. Versus the Yen, gold climbed back to the top of last Friday's prices in today's Asian session, back above ¥74,140 per ounce.

The Dollar price dropped early as Sydney opened for business. But it has risen steadily since then. And like Japanese investors, French and German gold buyers also stand near the top of last Friday's prices too.

Versus the Euro, in fact, gold has recovered half of its drop from the big top of Wednesday last week.

"The market has formed a reasonable base around the $610 level," said a Singapore-based trader to Reuters, "and the market should trade higher based on the fact that gold has been resilient in the face of weakening oil prices and a strong US Dollar."

The Dollar just hit a 13-month high vs. the Yen. It also reached a 7-week high against the Euro after the European Central Bank (ECB) failed to join the UK in raising rates Thursday.

Jean Claude Trichet, ECB president, said the bank would not be using "strong vigilance" in setting monetary policy. But Europe's already got "weak vigilance" in spades, despite the ECB's official aim of capping money supply growth to control inflation in consumer prices.

The supply of Euros in cash, bank deposits and short-term notes is now rising by 9.3% year-on-year. So you never know – strong vigilance might be needed sooner or later.

And what of that interest-rate hike by the Bank of England yesterday – what will it achieve beyond front-page headlines today? The Old Lady raised rates twice last year. Broad money supply grew by 14%.

Indeed, Mervyn King and his team on the Monetary Policy Committee have now raised rates 7 times since the middle of 2003. That's taken Sterling – the darling of central bankers looking to flee the US Dollar – more than 10% higher on a trade-weighted basis.

But household debt in the United Kingdom keeps rising regardless. It now totals more than $2 trillion – equivalent to an entire year's GDP.

House prices are rising at double-digit rates yet again. And a quarter-point hike in base rates won't touch credit card limits or the sub-prime mortgage market. Not for a while...

In the meantime, British investors are offered a discount on gold, relatively speaking. The Pound now stands at a 9-year high against the Japanese Yen. Sterling is the only major currency that hasn't seen gold rising in today's Asian trade.

Outside the currency markets, "the base metal rally has shown that metals in their entirety are fairly robust despite the weaker demand," says a dealer to Reuters.

Nickel prices leapt Thursday on news of falling inventory. But crude oil – tied to gold in this bull market so far – dropped again.

Crude oil sold in New York fell below $52 a barrel for the first time in 19 months yesterday. The plunge came after the US Energy Department said US fuel consumption last week fell to the lowest since April 2004, down 4% for the week.

Whatever happened to Chinese demand? Where are the hedge funds driving oil prices higher at the Nymex? Is that it for the bull market in energy?

For a review of the commodity cycle as 2006 turns to 2007, click here and read on now...

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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