Boom time for gold

And just like that, the annual knees-up of the gold industry, the London Bullion Market Association conference in Montreal, is over. What did we learn? Well, that the vast majority of people are bullish, although most believe there will be a correction in the short term. So nothing earth-shattering there.

The thing that struck me, navigating the conference halls, cocktail parties, and bars, was just how good things are in the gold industry right now. Regardless of whether the price is going up or down in the short term, the sector is highly profitable and the upbeat mood was palpable in Montreal.

But which part of the industry is enjoying the conditions the most? Ironically, it is probably not the miners (who produce the stuff), the bankers (who sell it), or the investors (who buy most of it these days).

From my conversations over the course of the last three days, I got the impression that it was the back office functions of the gold industry – the refining, minting, vaulting and transport industries – that are enjoying the greatest boom.

Mints and coin dealers – One of the clearest insights provided from Montreal is quite how strong the physical market is. The strength is not limited to one part of the world but constant across the US, Europe and Asia.

The Rand Refinery told me that they were selling more Krugerrands to Germany than ever before, including during May last year: theyare producing at a record rate of 50,000 ounces a week. They are predicting sales of 150 tonnes of gold bullion to China – general consensus here is that Chinese imports could be more than 400 tonnes this year, versus 240 tonnes last year.

The Royal Canadian Mint is set to sell 30 per cent more silver Maple Leaf coins than last year – itself a record. And the Maple Leaf is on track to overtake the American Eagle as the world’s top gold bullion coin this year, for the first time since the US Mint started making Eagles.

With Indian wedding season, Christmas, and Chinese new year all coming up, do not bet against the physical market to prop up the gold price. As Terry Hanlon, president of Dillon Gage, a Texas-based bullion broker, put it, the market is “hotter than a firecracker”.

Refiners – The refining industry, led by the Swiss groups Valcambi, Pamp, Argor-Heraeus and Metalor, as well as the Rand Refinery in South Africa – is enjoying a boom time. On the one hand, demand for refining services is strong, with gold miners rushing to monetise their product as fast as they can, and scrap flow, at least in the west, running high. On the other hand, demand for physical gold is as high as it has ever been. Crucially, demand is not for the 400oz bars that underlie most of the trading in London but for smaller, value-added products such as wafers and small bars in the Asian markets, which translate into higher margins.

Refiners come second to the mints for two reasons. First, many of them are based in Switzerland and therefore have seen a chunk of their profits eroded by the strength of the Swiss franc. Secondly, they are facing up to the likelihood of significantly more stringent regulations on traceability on the back of the “conflict minerals” section of Dodd-Frank. That creates uncertainty and, at the end of the day, is likely to raise costs.

Logistics companies – They are the true back office of the gold market. And demand for the services of the vaults, assayers and transport and security companies has never been so good. They were out in force in Montreal, with Brink’s, Via Mat and G4S all well-represented. With investor demand for physical gold soaring and vault space (at least in London) at a premium, the industry is riding high. The only challenge for the logistics industry is that with prices moving up by $400 in a couple of months, insurance suddenly becomes hugely more expensive.

Analysts – What is the net present value of a precious metals analyst? It seems pretty high. Everyone wants to know where the market is going to move next; most in the gold industry have plenty of money on their hands to pay for the research. Exhibit number one: the sale of GFMS, the research consultancy, to Thomson Reuters for an undisclosed but apparently very healthy sum.

Bankers – Precious metals is one of the most profitable parts of some investment banks, at least relative to number of employees and capital deployed. So the bankers – who make up the majority of the attendees at the LBMA conference – are enjoying the fat times. A slight cloud on the horizon, however, is the jump in volatility in the past month or so, which makes running a trading book a little more challenging for the typically risk-averse precious metals bankers.

Investors – They ought to be loving the gold market at the moment. And indeed for many of them, with John Paulson being the most prominent, gold has gone some way to saving what has otherwise been a dire year. But many investors have struggled with gold all the same. They got out too soon, tried to get back in again only to see the market drop once more, and then missed much of the rally. One thing I heard several times is that the hedge fund crowd are not much in the market right now. Add that to the fact that most of them are bullish and that creates another reason for a price rally.

Miners – The mining industry is probably the most disappointed group in the gold market at the moment. They spent a decade closing their hedge books to give their investors full exposure to the gold price – only to see their share prices continue to underperform it. The sense of frustration is clear. As Tye Burt, chief executive of Kinross Gold, told me: “It’s a bit of an irony, there’s never been more ounces tied up in the ETF – which is excellent – but there’s no doubt it has somewhat cannibalised what would have been demand for the equities.”

Next year’s conference is, fittingly enough, heading to Asia. Apparently the choice is between Hong Kong, Singapore, and Beijing.