Gold Price Increases Leading to Consolidation

By Dave Brown – Exclusive to Gold Investing News

Gold prices have been surging lately, and with plenty of reason. A second quarter which has seen headline news on the financial precipices of debt contagion in Europe, potential U.S. credit rating downgrades, Middle East tension and an earthquake in Japan have combined in a tailwind for gold price appreciation. With such a volatile dynamic context capital markets appear to be trading on sentiment and any global recovery appears to be in its infancy stage at best. In such times of uncertainty, many gold investors and industry stakeholders have seen that “crisis is danger plus opportunity.”

Consulting, audit and tax firm PwC recently released a report summarizing the merger and acquisition activity and corporate reorganization during the second quarter. Over the last three months, the Canadian equity market has demonstrated a strong appetite for deals including 836 merger and acquisition announcements worth approximately $57 billion. This investment restructuring is equivalent to the strongest deal quarter since prior to the credit crisis of 2008.

Dominating this arena, as most investors could appreciate, are the resource and energy industries accounting for as much as 45 percent of the activity; however, they actually under-represent the sector constituents which have increased organically due to inflated commodity prices to account for 51 percent of the market. “Mega deals” during the quarter included the world’s biggest gold miner Barrick Gold Corp. (TSX:ABX), which made a $7.8-billion acquisition bid for copper miner Equinox Minerals.

In the report, mega deals worth $1 billion each contributed to most of the total value of all deals; however, with 71 announced middle market deals worth a combined $23 billion the diverse mix included a healthy cross section. There were also a considerable number of smaller deals worth less than $100 million, primarily within Canada’s junior mining and energy marketplace.

Prices climb on continued fear

On Wednesday, gold increased to $1,672.80 per troy ounce, up $21.80 from the previous trading session and nearly double the $880 per troy ounce spot market trading price from early 2009. Among other precious metals, silver tested three month highs, trading 0.2 percent higher on the trading session at $40.88 per troy ounce, while platinum and palladium fell. According to Bloomberg a report by JP Morgan (NYSE:JPM) suggested that gold might eclipse a record $1,800 per troy ounce by the end of the year, while copper revisits $10,000 per tonne.

Platinum has been the topic of some bullish reports by some analysts. The precious metal mitigates risk against fiat currency dilution currently engineered by the world’s central banks and provides exposure to global industrial growth exposure. GFMS, a metals consultancy firm, forecast in its annual Platinum and Palladium Survey that by the end of the year platinum will be “comfortably north” of $1,900 per troy ounce trading significantly above its present range of $1,780.

Outlook

With a rational tone of careful confidence the PwC report offers, “by nearly all measures 2011 has proven to be a perfect storm for Canadian M&A, as predicted in our annual outlook. What do we expect going forward? Our view is that M&A typically lags the broader capital markets. Many of the deals announced in Q2 can be traced to market sentiment in late 2010/early 2011. Given recent macro instability we expect cautious optimism to pervade for the remainder of 2011 and through 2012.”

According to alternative assets industry data provider Preqin, the capital available for institutional investors is over $195 billion. The considerable value of this wealth accumulation, combined with an aging global demographic profile offers the potential for strong pension fund demand for assets that can provide inflation protected long term returns or the storage of value. This broad secular investment thesis might also be favoured by foreign sovereign wealth funds given the current context of a low interest rate environment and a protracted period of US quantitative easing.

The report states, “Examples of deal sectors that will likely continue to be busy include real estate, infrastructure, timber, agriculture, gold and resource sector verticals.” Canadian dominance on the buy and sell side, “in many of these sectors will likely mean that Canadian dealmakers will fare better than other developed nations like the US and the UK.”

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.