This Is How You Get Got

You're in the Bushveld digging up rocks
Got, this is how you get got
LSE listed and offshore borrowings too
Got, this is how you get got
Trying to hustle in Africa without breaching FCPA
Got, this is how you get got
Some guy called Paulson said "I like your stock a lot"
Got, this is how you get got

TMM can't help but think of the lyrics of Mos Def's "Got" warning of the dangers of flaunting wealth when thinking about precious metal miners. GDX, the largest ETF covering gold miners has flown high and far since the end of 2008 and it supercharged much of the more inflationista funds' returns. Palladium is the standout but all of them ripped and ripped hard through mid 2011. If you were buying gold and particularly gold equities till you were almost blacking out you could do no wrong.

Recently however, this has changed as can be seen below. The first chart is gold versus GDX.

The second is a bunch of platinum miners and platinum and palladium. As you can see, for both the equities are not just doing really badly, they are underperforming physical in a big way.

Not that physical is looking healthy in gold - TMM's brokers indicate that given the stuttering out and decline in ETF ounces for gold seen below in white is a big part of the drop in physical (orange). Were it not for central bank dip buying things would likely be much worse.

So, aside from TMM's view that you've heard before - you know - that this recovery in the US is sustainable enough to not justify merciless slotting of USD as an investment strategy anymore - TMM thought it would be good to give you a couple of choice quotes from Eastern Platinum, a South African Platinum miner that they released in May last year.

On Friday 6^th May, mine vehicles were driven by employees through the security gate to the Zandfontein Mine causing damage to mine property.  Employees then embarked on unprotected industrial action. Mine services at both Zandfontein and Maroelabult underground mines were also damaged, and for safety reasons, the management at CRM instructed the mines to be vacated. Approximately 180 workers then proceeded to unlawfully occupy the mines. Mine management advised employees to cease this illegal action, and simultaneously, a court interdict against NUM and its members was granted that instructed NUM and the employees involved to cease the action and vacate the mine. The workers involved made several demands to management, as well as threats of damage to mine property and underground infrastructure if management did not comply with these demands. To safely resolve this situation, to prevent it from escalating, and to safeguard the overall integrity of mine installations, management had numerous meetings with NUM and instructed them to ensure that their members vacated the mine and ceased their unprotected strike action. An offer was made by mine management to resolve the situation but this was rejected by NUM and/or the employees involved who refused to vacate the mine and made yet further demands of management that were rejected. As these workers refused to vacate the mine, the offer made by management was then withdrawn.
Following the failure to resolve this illegal action by some of their members, NUM invited the Congress of South African Trade Union (“Cosatu”) to assist in negotiations with the instigators of the illegal industrial action. Certain statements were made by the Cosatu and NUM representatives to their members in order to encourage them to vacate the mine. There was no agreement in place between CRM and NUM/Cosatu at this time. The workers involved in the illegal action subsequently vacated the mine.

Stuff happens, but stuff happens more in emerging market countries that have bad institutions and whose labor unions are the political support base of the ruling party as the NUM is with the ANC. TMM would like to say that anyone who thought doing business in South Africa was going to be easy or allow one to earn the excess return of precious metals over the contents of South African CPI or any other wages proxy failed in a big way to understand this country. If you want to own a mine you don't just need high metals prices, you need them to rise faster than your costs. TMM think that mining in South Africa and having your profits increase very quickly is a bit like Mos Def's description of flashing all of your rocks in Brooklyn. Dangerous, and not a long run equilibrium.

TMM are still negative on South Africa where most of the gold and PGM output comes from, miners in bad jurisdictions and when we want to short USD we find something cheap, not something shiny. All great parties have to end and TMM thinks it time to call this one whatever the gold bugs say.