Resource prices have driven the Canadian economy for over a decade. Are the good times coming to an end?
For investors and producers alike, gold’s recent rout was as devastating as it was unexpected. The price plummeted by $200 an ounce over a two-day period last week, suffering its biggest single-day drop in 30 years. Though it eventually stabilized at around $1,400 an ounce, stocks of gold mines—many of them Canadian—continued to be hammered by investors for days afterward, with some reports suggesting that as many as 15 per cent of the world’s gold mining companies are now wallowing in red ink.
There are many theories as to what caused gold to fall so far, so fast. They range from rumours that Cyprus planned to sell off some of its reserves to pay for its bailout, to the easing of fears that central bankers are destroying currencies with their unprecedented stimulus measures. “People thought loose monetary policies lead to rampant inflation,” says Keith Head, a professor at the University of British Columbia’s Sauder School of Business. “But gold prices stayed high, even when the underlying theory was repudiated by actual evidence, and that’s a vulnerable situation to be in.”
The big question now is whether other commodity prices will follow suit. Though gold, which traded as high as $1,888 an ounce in 2011, is unique in many respects—it is valued mostly as a way to store wealth, as opposed to as an industrial input—prices of everything from aluminum to zinc have slumped over the past several years after hitting historic highs, creating fears of a broader crash.
Edward Morse, the head of commodities research at Citigroup, recently wrote that “the questions over gold and some overly securitized commodities like copper relate to whether their recent robustness is bubble-like and about to burst.” He claims that 2013 could be the year the decade-long boom in raw-material prices driven by China’s rapid growth finally hears its “death bells ring.”
How it all plays out will be crucial in determining Canada’s future prosperity. Nearly one-fifth of the country’s GDP can be attributed to resource industries and their spin-offs, not to mention half of all exports. “It’s been well-recognized, including by Mark Carney [the governor of the Bank of Canada], that commodities pretty much saved our bacon over the past few years,” says Pierre Gratton, the president of the Mining Association of Canada.
But now global forces appear to be working against us, with resource prices falling, just as a once-hot housing market falters and consumers are awash in debt. “Higher prices bring on more supply, which brings down prices,” Gratton says. “That’s the cycle and we’re in a bit of that now.”
The latest shoe to drop came earlier this month when China revealed its growth was slowing more than expected. It said GDP came in at 7.7 per cent in the first quarter, down from 7.9 per cent in the fourth quarter of 2012. That threatens to translate into less demand for everything from lumber needed to frame buildings to the nickel used to make stainless steel.
The news helped suck the air out of Canada’s already lagging stock markets, home to roughly 60 per cent of the world’s mining firms.
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