Randgold Highlights Mining Risk as Turkey Seeks Gold Bullion

On Thursday, gold prices declined to $1,642.50 per ounce, while silver fell nearly 90 cents to settle at $31.35.  Both precious metals have declined over the past few weeks.  While short-term corrections in bullion prices can be frustrating for investors, the pullback in miners has been even more pronounced.  In the past month, the Market Vectors Gold Miners index declined almost 11 percent, while the Market Vectors Jr. Gold Miners index has fallen 14 percent.  However, both indices fail to compare to the steep sell-off seen in Randgold Resources.

Founded in 1995, Randgold Resources is an African focused gold mining and exploration company.  Yesterday, shares closed 12 percent lower after reports of renegade soldiers overthrowing a democratically elected government of Mali, where the miner has operations.  Chief executive Mark Bristow, said the military coup did not affect operations of the company, which relies on mines in Mali for the majority of its production.  “Malians respect laws and I don’t believe this will come with a high-handed change in political direction.  We don’t expect any subsequent governments to disregard proper and due process,” Bristow said in a press release.  He also went on to explain, “Operations are running normally, people are at work.”

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The plunge in Randgold shares is a perfect example of the political risks in gold and silver miners.  Even though Randgold’s CEO dismissed the conflicts taking place, shares still sold-off on the news with heavy volume.  More than 3.8 million shares were traded yesterday, compared to a three month average of about 600,000 shares.  Today, shares fell another 3 percent on more than 2 million shares of volume.  The two-day plunge has taken shares back to July 2011 levels.  The recent price action has also caused Citigroup and J.P. Morgan to downgrade their stock ratings on Randgold.

For many investors, physical bullion holdings are still the best way to invest in precious metals.  Physical gold and silver does not carry counter-party risk or receive downgrades.  Furthermore, investors can take comfort in the fact that precious metals are an asset outside of the problematic banking system.  However, some governments are trying to change these benefits as an act of financial desperation.  Government officials in Turkey will soon launch an incentive plan for consumers to store their bullion inside the country’s banking system.  The WSJ reports, “The push to tap into the individual gold reserve-the traditional form of savings here- is part of Ankara’s efforts to reduce a finance gap that is currently about 10 percent of gross domestic product.”  The Istanbul Gold Refinery estimates that 5,000 tons of gold may be stored outside of the banking system in Turkey.

One of the new incentives being considered is interest-yielding gold-deposit bank accounts that would allow customers to earn interest and withdraw their gold bars from automated teller machines.  This appears to be a challenging feat for the Turkish government, because most people do not hold gold for interest payments, but rather its intrinsic qualities.  For example, people not having to rely on a bank’s automated teller machines to return their own gold is very comforting in a time of crisis.  “Turkey has historically been hit by crises and inflation, so the tradition of holding gold outside the system could be hard to shift,” said Murat Ucer, an economist at Global Source Partners, an Istanbul-based research consultancy.  According to the World Gold Council, Turkish consumer demand for gold bar and coin investments hit 80.4 tons ($4.1 billion) last year, compared to 40.5 tons ($1.6 billion) in 2010.

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Disclosure: Long EXK, AG, HL, PHYS

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com