Australians are extremely vulnerable to the dangerous forces beginning to develop around world. It’s not so much the reasons behind the dramatic fall in the gold price that scare me, but rather the side effects that are rare if not unique in our history.
The gold fall was caused by a reckless European central banker, Mario Draghi, who used words that appeared to instruct Cyprus to dump its gold, which naturally triggered wave of selling by the multitude of computer driven gold fund vehicles. And that computer driven selling was augmented by shorting and it spread to other precious metals.
If that was all that was happening then I would say “what’s new” the crisis will pass and global money printing will in time eventually return gold to favour, although it might take a few months.
Unfortunately, that is not all that is happening. Many of the events have been detailed in Business Spectator and other places on an individual event basis. I will now bring some of them together.
– At least since the 1980s, whenever there was a big fall in gold and other commodities, there has been a sharp fall in the Australian dollar, which would cushion the impact. Our currency is still trading above US dollar parity let alone the 80 or 90 cents you would have historically expected given the 30 per cent fall in the gold price and the sharp declines in oil, copper and other commodities.
That means the squeeze from the commodity fall will be much more intense on our prosperity and our tax revenues. Why did the Australian dollar not fall sharply? The reasons include the global currency money games being played, our internationally high interest rates and the fact that we are still bringing in huge sums to fund badly managed LNG projects like Gorgon in Western Australia and and Curtis Island in Queensland.
– For as long as I can remember Australia has been a low-cost miner so that when global commodity slumps took place not only did the currency adjust but, because we were at the bottom of the cost curve, we could ride through the tough times. This time around we were caught with a set of boards and managers who did crazy deals with their work forces partly because they were not strong enough to resist the pressures created by bad industrial relations legislation. Mining productivity slumped and capital costs soared (A mining boom cut-off is coming, May 21 2012), (Contract killers for the mining boom, April 15).
So we go into this downturn as high rather than low-cost miners. Fortunately, thanks to the remarkable efforts of former Victorian Premier Ted Baillieu (supported by his successor) followed by New South Wales Premier Barry O’Farrell and Queensland Premier Campbell Newman, we can fix the problem - especially if Western Australian Premier Colin Barnett follows. Thanks to these leaders we can in time restore competitiveness to east coast mining, but a lot of chief executive officers will need to learn new skills or be shown the door. (States align to bust building unions, March 25).
– We have a federal government that in the face of lower future taxation revenue from our mining industry is spending as though the boom is still here.
Gonski is an admirable educational objective, but to do it when mining tax revenue is about to fall sharply means it will either be abandoned by the next government or paid for with public servant job cuts. Given all the things that are happening, borrowing to fund deficits will be much tougher.
– We face a gas crisis in our largest state New South Wales created by bad governments (New South Wales, Queensland and Canberra) and bad corporate management. This means that unless there are dramatic changes by 2015 or 2016, Sydney gas prices NSW will double - if Sydneysiders can get gas. That can still be fixed but it will not be easy (Gas hikes burn China’s investment presence, April 15).
– The local problems compound what is happening overseas. China has changed direction and it’s not so much the rate of growth that is the problem but the fact that the growth will require far less Australian commodities. Citibank has declared the commodity boom over. You will remember the dramatic day in February when it was clear there were big changes ahead in China (China makes a frightening energy shift, February 7 2013).
– The US expenditure cuts are starting to affect the American economy, which is losing steam. And Europe is European.
– In past US quantitative easings the surplus printed money was spread between shares and commodities. This time it went almost entirely to shares boosting prices dramatically (Can stocks keep lifting a hefty copper weight?, April 4). Kitco reports that Walter Zimmerman Junior, chief technical analyst at United-ICAP, points out that last divergence of this magnitude was took place at the peak of the dot-com bubble, indicating that the stock market maybe a speculative bubble unsupported by the real economy. Hopefully Zimmerman’s warning is wrong, but we are looking at dangerous signs.