The Coal Buy Signal
by David Archibald
19 August 2020
The signal to buy gold was the Reserve Bank of Australia’s selling of two thirds of Australia’s then gold reserves, at about US$350/oz in 1997. That was 167 tonnes, then worth US$1.9 billion and now worth US$10.7 billion. The reason the RBA sold most of our gold is because they considered gold to be a barbaric relic left over from unenlightened times. The official reason was that they weren’t getting an interest income from the holding.
US$ Gold Price 1973 – 2020
While the nation has had some US$9.0 billion of value forgone by that RBA decision to date, that figure is set to blow out given credible forecasts of what the gold price will do. For example, the New York investment firm of Goehring & Rozencwajg recently produced a report entitled “On the Verge of an Energy Crisis”. On page 20 of that report is this discussion of the gold price outlook:
There is an historical relationship between the size of a central bank’s balance sheet and the price of gold going back to the Federal Reserve’s establishment in 1913. Even adjusting the Fed’s balance sheet for excess reserves (a debate in and of itself), we believe today’s balance sheet justifies a gold price in excess of $15,000 per ounce on the low side or $25,000 per ounce on the high end.
The discussion continues on the following page:
We have written how the current gold bull market will be driven by Western investors, compared with its first leg which started in 1999 and ended in September 2011 and was dominated by Eastern buyers, particularly from India and China. We also explained how the upcoming bull market would have a huge speculative element to it — again quite different from the first leg of the bull market that was mostly orderly and driven by value-conscious Eastern investors.
The lesson learned from that RBA selling in 1997, that we can use in our own lives, is that virtue-signalling hysterics produce the highest-quality buy and sell signals. They pick the bottoms and tops of multi-decadal trends — just do the opposite of what they do. So this announcement from BHP is exciting:
Our major mining companies have been captured by virtue-signalling hysterics, and management makes sure they are succeeded by other virtue-signalling hysterics. What has low emissions got to do with company profitability?
These companies have also lost competence in running mining operations. For example BHP set out to reline the Whenan Shaft at its Olympic Dam mine for $80 million, and gave up after spending $400 million. Rio Tinto’s Kestrel coking coal mine in Central Queensland was producing 5 mtpa when they sold the mine. The new owners have it producing at 12 mtpa from the same facilities. BHP and Rio Tinto are run by incompetent, virtue-signalling hysterics, but that is also true of the whole country now.
Why might coal now be a good multi-decadal investment? The reason goes back to the coming energy crisis detailed in the Goehring & Rozencwajg report. It will start with oil and when it is apparent that the oil price will remain above about US$120/barrel, coal will be converted to supply some of the niches that are currently supplied by oil.
Each tonne of coal, on average, contains the equivalent of two barrels of oil. So a coal mining company with two billion tonnes of reserves has the equivalent of four billion barrels of oil. In the first decade of this century the natural gas price, for a few years, went to the oil price in energy equivalent terms. Eventually the coal price will go to the oil price in energy equivalent terms, less the conversion cost. That frabjous day is coming.
David Archibald is the author of The Anticancer Garden in Australia