Something is wrong when yields are low but the risk is high
There was a time, some years ago, when a trip to Hong Kong Mines and Money conference was one filled with optimism and talk of growth, profit and so on. These days the message is more mixed. No more so than when discussing gold.
When the real economy is in good shape, the outlook for gold weakens. When it's not, gold rises. That's when the price signals are working correctly.
But as Grant Williams explained yesterday, the price signals are suggesting all is rosy in the global economy when in fact it's not. Since Mario Draghi's "whatever it takes" comments last summer, markets have soared and gold has fallen, indicating that investors were feeling less uncertain and had begun to believe the worst of the crisis was over.
"Nothing could be further from the truth," says Williams, who is a portfolio and strategy adviser for Vulpes Investment Management.
He believes there is a "massive misperception of risk" because governments have corrupted the price signals - by which investors determine the risk premium - by artificially forcing down interest rates by printing money. As a result, the prices of all kinds of assets have soared, bringing down yields of even risky assets to levels that have not been seen in decades.
Junk bond yields have fallen below 6 per cent for the first time since 1997. Countries like Spain with unemployment at 26 per cent and youth unemployment at twice that, zero economic growth and teetering on collapse, are able to borrow at ever lower rates.
The strategy of the central banks, according to Williams, is to restore confidence to encourage investment, which will engender growth and enable the central banks to withdraw their funds. This exercise has transferred the risk from the private sector to the sovereign countries, which now carry huge amounts of high-risk debt.
Williams says the situation has been made worse by central bank activity in the gold bullion market. By leasing a significant size of their gold reserves to bullion banks, the supply of gold has risen while at the same time exerting downward pressure on prices. The gold has been sold several, if not more, times over. So long as everyone does not ask for their money or gold back at the same time, all is well.
But some central banks have been asking for their gold, and Williams warns there is a real danger that should there be any further serious economic hiccups which lead to a decline in confidence, it could create a situation where a bank is unable to get its gold and has to be paid in cash. This, he says, "would send shock waves through the system". This brings us to the point of all this, because this is when gold will soar, says Williams. This is why gold bulls say we must all have some. However, if the price does take off, the deterioration in the social or economic conditions that caused it to do so would mean that everyday life would be fairly unpleasant.
Three years ago, Robert Friedland - the rock star of the mining world - told the Hong Kong Mines and Money conference: "Hong Kong will become the largest mining finance market in the world." That hasn't happened yet. Nevertheless, the conference, which is organised by the publishing group Aspermont together with Beacon Events, is now in its sixth year. It is the largest mining event in Asia and the world's third-largest, according to the organisers.
There's been a seismic shift in this year's organisation of the conference in that for the first time in four years Friedland will not be giving the opening keynote speech. It was usually about the vast Oyu Tolgoi mine which Ivanhoe Mines - of which he is the founder and former chairman - discovered in Mongolia and developed before it was sold to Rio Tinto.
Friedland now describes himself as the chairman of Ivanplats and will speak tomorrow on "Turning major discoveries into world class mining projects". This will presumably be about his Kamoa project in the Democratic Republic of Congo, which he told the London Mines and Money conference, with his characteristic understatement, has the potential to become the largest copper mine in the world.
This project is one of a number within Ivanplats which he says he intends to list on the London Stock Exchange in the first half of this year.
It should be a rousing presentation.