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OPINION

Silver producers regain their lustre

Silver producers regain their lustre
May 30, 2019
Silver producers regain their lustre

There has certainly been no shortage of activity in the sector of late. Canada’s Barrick Gold (US:GOLD) – the product of last year’s merger between Randgold Resources and Barrick Gold – is now mulling over a proposed $1bn (£0.79bn) expansion of its Pueblo Viejo mine in the Dominican Republic, a joint venture with Newmont Goldcorp (US:NEM).

The news came hot on the heels of Barrick’s proposal to buy the remaining 36 per cent of Acacia Mining (ACA) it doesn’t already own, albeit at a hefty discount. Acacia, Tanzania’s leading gold producer, has been embroiled in a long-running dispute with the country’s government, which resulted in a punitive – and wholly unrealistic – tax charge of $190bn. The two parties aren’t on talking terms, so Barrick is stepping in to smooth over matters.

Barrick’s call on the Pueblo Viejo mine could well be swayed by the activity of central banks in the first quarter of 2019. Figures from the World Gold Council show that national banks, led by those of Russia and China, bought 145.5 tonnes of gold during the period, a 68 per cent increase from a year earlier, and the largest first-quarter increase in global reserves since 2013.

Why are they buying? There seems little doubt that there is a concerted effort by emerging market economies to substantially reduce their dollar-denominated foreign-exchange reserves. The aggressive stance taken by Washington on trade matters isn’t all about restoring manufacturing jobs to the rust belt. Speaking at a press conference during his recent state visit to Japan, President Trump said that the probability of a trade accord with China had become less likely.

Whether the hardball stance is justified or not, it could conceivably accelerate the shift out of US debt by foreign creditors. Admittedly, gold prices softened through May as the yuan lost ground, but over time we could witness a gradual erosion in the relative value of the greenback, particularly as the US continues to run a structural deficit, some $779bn in fiscal 2018. This is highly significant for anyone holding physical gold assets or securities given the metal’s inverse relationship with the dollar.  

The metal could find near-term support through a more traditional source – the Akshaya Tritaya wedding season. Weddings are a major determinant of the level of gold purchases in India as jewellery is an essential part of a bride’s dowry. India is the second-largest market for bullion globally, and this wedding season should benefit from a marked increase in the number of days considered auspicious in the Hindu calendar.