With The Drought Over, "Gold Fever" Grips California

The heavy rains that pummeled California this year ended the state’s historic drought in spectacular fashion, saving the state’s farming and tourism industries from an uncertain future. But the return of rainfall has had other less obvious economic ramifications, including, as the Los Angeles Times reports, the revival of an activity that’s been associated with the state for more than 150 years: Prospecting for gold.

Thanks to the rain, the yellow metal is once again being found in the state’s riverbeds for the first time since a judge’s controversial ruling prohibited the use of pumps and other equipment that were once required to extract gold from the state’s rivers.

Russ Tait

And now that word has spread, the possibility of discovering immense riches underfoot is inspiring entrepreneurial Californians of a variety of ages and backgrounds to venture to the state’s rivers and creeks in search of the shiny yellow metal, sometimes equipped with little more than a pan, as they hope to collect gold fragments buried in the muck under the water, according to the LAT.

Many have also taken to prospecting to suppliment their incomes, as wages in the US have stagnated and more than 90 million Americans aren"t working.

Russ Tait, an elderly man who spoke with the LAT, insists om venturing down to Eagle Creek in Central California – not far from where the Detwiler fire broke out in Northern Mariposa County.

“Tait has bone cancer, so getting down to the creek isn’t easy. But even if his days are numbered, he isn’t above dreaming. He peers into the murky solution, hoping to glimpse something shiny.

“I guess you call it gold fever,” he says. “You get out there, and there’s times where you get tired and you don’t want to quit.”

Even in the middle of the drought, Tait, a longtime prospector, and several friends would venture down to the river looking for gold, only to return empty handed. The reason? Back in 2009, a state judge temporarily blocked prospectors from using motorized equipment near the state’s rivers after environmental groups complained that they could damage fish habitats. The ruling was meant to be temporary pending a study, but to this day, no final ruling has been made.

"The equipment was once necessary to separate gold from the slowing rivers. But now with water gushing forth from the state’s mountains, the motorized equipment isn’t needed.  

Now prospectors hunt for “irregularities” in rivers that could create “a backward eddy” that would allow the gold to drop to the water’s floor.

Excessive ria severe flooding, and very nearly the failure of the Oroville dam in Northern California, has changed that.

Geological gumshoes, they search for ancient rivers, for rounded boulders tumbled together, for orange soil tainted by rusted iron and veins of quartz hiding gold.

They read streambeds, imagining how the current flowed during floods, hunting for any irregularity — a riffle, a ledge, a waterfall — that could create a backward eddy for the gold to escape the water’s momentum and drop to the floor."

One prospector named Robert Guardiola helped organize an outing of nearly 40 miners to the Golden state"s “Mother Lode." Guardiola and company are wearing waders and knee pads and equipped with pans and cradles.

“Late afternoon, after nearly an hour in the water, Guardiola totes two five-gallon buckets up from the creek. One contains trash collected from the shallows: a spark plug, a shotgun shell, a square-headed nail, a spatula and part of a car door.

The other contains his concentrates, less than a cup of dark sand sloshing about in water.

Panning it, he separates the lighter material from the heavier to reveal a few gold specks, each no bigger than a fat flea.”

As the LAT explains, the “Mother Lode,” which runs along the Sierra Nevada mountain range, was the epicenter of the 1848 gold rush, which saw $2 billion in gold extracted from the area in less than five years. For Guardiola, prospecting has become a second career of sorts.

“Guardiola, 52, purchased the right to mine these 20 acres in 2001. When he first walked out on this property, he knew he could be happy here. Ten deer, two bucks and fawns browsed beneath the oaks. A stream — Grizzly Creek — cut through the property, which already had two mines on it, always a good sign.

Seven years later, after losing his equipment rental store in Modesto to a broken plumbing pipe and a slow insurance claim, he began to work the claim more seriously.

Prepped for the cold — insulated waders, booties, wool socks and sneakers — Guardiola wades into a pool of 55-degree water as deep as his thighs.

“We’ll see if Mother Nature was kind and restocked my bank,” he says.

According to the LAT, the stream was dry during the worst days of the drought. Last year it became a trickle. Then this year, the winter brought a torrent of water as well as two feet of new rock and gravel deposits known in the profession as “overburden.”

For the amateur prospectors, the hobby has brought with it a kind of hope.

“As long as I’m not sure what’s in the bucket,” says Tom Mutschelknaus to the LAT, “there’s hope.”

Mutschelknaus prospects near the South Fork of Stanislaus River, a few miles from where one lucky miner pulled nearly 800 ounces out of the ground. Many prospectors have been following gold’s climb this year, excited that an amount that would almost fill a lipstick case is worth more than $1,200.

While the LAT doesn’t touch on the parallels between the gold miners and cryptocurrencies like Bitcoin and Ethereum, often referred to as “digital gold,” Shannon Poe, 55, described prospecting in similar terms to the techno-libertarians who represent bitcoin’s most hardcore users.

“In his company, gold mining seems less a get-rich-quick scheme than a libertarian impulse, an exercise in independence and self-determination as much a part of the American heritage as the rights guaranteed by the Constitution.

Ask him what his political party is, and he’ll say he is neither a Republican nor a Democrat.

“We are more constitutionalists than anything else,” he says.

With this framing in mind, the rush of amateur prospectors is hardly surprising. Since bitcoin first entered the public consciousness in 2013 thanks to stories of hobbyists becoming newly minted millionaires overnight, Americans everywhere are looking for the next easy score. In that respect, similar impulses appear to be behind both trends. But at least with prospecting, the only thing hobbyists are risking is their time.

Commodity Carnage Crushes Trumpflation Hopes: "Everyone's Nervous The Bottom Is Falling Out"

Another night of ugliness in Asia as the "froth" is blasted out of the exuberant hot-money-chased commodity markets. Chinese steel and iron ore futures tumbled on Wednesday to the lowest prices in months as market sentiment turned bearish on the demand outlook.

As Reuters reports, China"s producer price inflation cooled for the first time in seven months in March, pressured by fears that Chinese steel production is higher than demand, leaving a glut of the metal later this year.

"We"re not seeing much interest on the buy side, everyone is nervous that the bottom is falling out," said a commodities trader in Perth, Australia, who closely monitors activity on China"s Dalian and Shanghai Futures Exchanges for overseas clients.

The most active rebar contract on the Shanghai Futures Exchange settled 3.5 percent down at 2,893 yuan ($420), the lowest since Feb. 2. The sharp decline in steel futures has tamed buying interest in the physical market as well. Iron ore for delivery to China"s Qingdao port has swung into a bear market, with the price sinking more than 20 percent from its 2017 high in February to $74.38 a tonne, according to Metal Bulletin.

It seems the hopes of Trumpflation (and the fading China credit impulse) has erased growth hope...

China's Record Iron Ore Glut: Enough To Build 13,000 Eiffel Towers

Earlier this week we discussed the reason for the recent drop in iron ore prices, which had been attributed to the discovery of massive data fabrication and misrepresentation of commodity production cuts in China (think OPEC), whose biggest steel-producing province was found lying about mandatory output reductions, and instead of curbing was in fact accelerating production.

A steel factory in Wu"an, Hebei province

As Reuters reported at the time, Hebei, China"s biggest steel-producing province, launched a probe into steel overproduction in the city of Tangshan "amid concerns that firms have continued to raise output despite mandatory capacity cuts."

Tangshan is the heartland of Chinese steel production. The city is home to the headquarters of the state-owned Tangsteel Group, which in 2006 merged with other companies to form Hebei Steel Group, the second-largest steel producer in the world. Located around 100 miles east of the capital Beijing, Tangshan is on the frontline of the country"s "war on pollution", and was seventh on the list of China"s ten smoggiest cities in the first two months of this year.

Hebei was ordered by China"s central government to investigate firms in Tangshan that have "restricted but not cut production, restricted production but not actually cut emissions, and cut capacity but actually increased output," the provincial dated March 25 said, and circulated by traders on Monday.

The notice, sent on Saturday, cites orders from President Xi Jinping and Zhang Gaoli, the vice-premier, for Tangshan to investigate the problem of falsely reported plant closures and rising steel output.

Fast forward to Friday, when the environmental protection ministry quickly found pervasive problems "including data fabrication and output curb failure" in air pollution checks in 1Q at some 3,119 companies or nearly 40% of the 8,500 companies inspected, according to a statement from the ministry. Among the companies names, Chalco’s Henan unit didn’t fully implement output curbs in heavy pollution days, according to findings of the inspection while an affiliate to BAIC Group found to have "not strictly implemented VOC emission standards." Amusingly, companies including a Foxconn affiliate in Langfang city tried to reject inspections The inspection covered more than 8,500 companies in regions including Beijing and Tianjin.

Ok, so China lied again; that in itself is hardly newsworthy. After all China lies about everything, from its GDP, to its gold holdings, to its reserve outflows, to the total debt in its economy.

However, for iron ore traders, the implications could be dire, as China"s activity means that instead of reducing production to reach a demand equilibrium, it had merely been stockpiling iron ore inventory at various ports around the country, while giving the world the false impression that output, and thus the market, was tighter than it was in reality, sending iron ore prices nearly doubling over the past year - one of the primary culprits for the global reflation wave that has been misconstrued as a global economic recovery - even though in recent weeks iron ore prices have stumbled as China"s ruse has finally been exposed.

The question then becomes what happens with China"s unprecedented iron-ore stockpiles, especially at a time when Beijing is actively seeking to impose curbs on the housing bubble. For those unfamiliar, this is what China"s total iron ore inventories look like as of this moment: they are now at all time highs.

That chart above, however does not do justice to China"s inventory glut, so here is another attempt at putting it in context from Reuters, which writes that with enough iron ore to construct Paris"s Eiffel Tower nearly 13,000 times over, China"s ports are bursting with stockpiles of the raw material and some of them are demolishing old buildings to create more storage space, trading sources said.

Inventory of imported iron ore at 46 Chinese ports reached 132.45 million tonnes on March 24, SteelHome consultancy said, the highest since it began tracking the data in 2004. A third of the stocks belongs to traders and the rest is owned by China"s steel mills, SteelHome said. That volume would make about 95 million tonnes of steel, enough to build 12,960 replicas of the 324-metre (1,063-foot) high Eiffel Tower in Paris.

Some ports, trying to manage their storage space, have in recent weeks rejected vessels carrying lower grade iron ore that is less preferred than higher quality material and could take months to clear, said a source at a foreign trading firm that has millions of tonnes of the steelmaking ingredient at Chinese ports.

"We have sent our people around the major ports in China and some are trying to find extra space. They"re demolishing some abandoned buildings to create more space," said the source, who declined to be named because he is not permitted to discuss the matter publicly.

It"s only getting worse: if iron ore stocks continue rising "we"re going to reach maximum physical capacity at all ports in China by early June, said the source. "We saw some ports rejecting low-grade shipments which are very difficult to liquidate."

* * *

Meanwhile, having believed China"s lies about production cuts and sending prices to a two and a half year high, global commodity traders are suffering from a case of accumulated buyer"s remorse with global iron ore prices now just above $80 a tonne from a 30-month peak of $94.86 reached in February, largely due to the growing port inventory.

Prices surged 81% last year, bringing relief to miners after a three-year rout. The rally stretched into 2017, inspiring marginal producers to resume business and lifting supply as China"s steel demand waned. Further falls in the price of iron ore risk shuttering Chinese capacity again. That could boost China"s reliance on top-grade exporters Vale, Rio Tinto and BHP Billiton.

The recent price surge only made matters worse, with China"s domestic iron ore production jumping 15.3% in January-February as a price rally last year extended into 2017, causing imported ore to pile up at the ports of the world"s top buyer.

Needless to say, local merchants and producers are already starting to panic at visions of iron ore prices in freefall. Including another 40 million tonnes of iron ore at China"s steel mills "that"s too much of stock," said Li Xinchuang, vice chairman at China Iron and Steel Association. "It will be very dangerous for the price. That"s what"s very worrying about it," Li told Reuters at an industry conference on Thursday. Worse, Li said most of the stocks in ports were high quality iron ore despite perceptions in the market that the bulk of it was low-grade eliminating the ability to deny low quality ore.

An official at Jingtang port in Tangshan told Reuters there are 15 million tonnes of iron ore stocked there currently, not far from its capacity of 20 million tonnes.

Paradoxically, even as China"s iron ore glut hits extreme proportions, China continues to import the commodity with Australian miner Fortescue Metals Group, the world"s No. 4 iron ore supplier which ships lower grade material mainly to China, saying its deliveries to the country are "continuing as normal."

"While port stocks overall are at relatively high levels, Fortescue"s share of those stocks aligns with our market share of imported ore into China," Fortescue CEO Nev Power said by email in response to a Reuters query.

A truck drives past piles of iron ore at the dump site of a port in Rizhao.

Chinese ports can refuse discharge of some shipments and it"s up to the importer to find another port but costs due to delays would be borne by the importer, said a shipping manager for a Chinese trading firm. Still, slow demand could swell port stocks further as more shipments tied to Chinese mills" long-term contracts with miners arrive and traders scour the market for clients.

"We have a fleet of vessels on their way to China with no buyers. We"re trying to find buyers," said the foreign trading source.

If no buyers are found, iron ore prices will plunge, resulting in another shock to China"s manufacturing sector, leading to another collapse in cash flows, a surge in bailouts and defaults, and a fresh deflationary wave being unleashed on the rest of the world as China"s wholesale inflation once again tumbles into negative territory.

Iron Ore Stocks At Chinese Ports Hit New Record Highs: Why This Is An "Ominous Sign" For Prices

As Axiom Capital"s Gordon Johnson points out, Iron Ore stocks at Chinese ports just hit a new record high in the last week of 2016, even as the spot price of iron ore staged a dramatic comeback over 2016, closing near the highs of the year. However, as Johnson notes, if history is any precedent, such record stocks "carry an ominous sign for iron ore prices." Here"s why.

After jumping by the biggest 1-wk increase since Oct. ’15, +2.7% w/w, iron ore inventories at Chinese ports reached a new record high of 114.0Mmt on 12/30.

Using implied consumption as a denominator (i.e., the latest data on daily pig iron output x 1.6), days of inventory for port stocks topped 38.6, the most in 2-yrs.

While inventory restocking at China’s ports likely helped support prices, w/ an intense destock likely in the offing, Johnon sees "downside risk to prices as imminent."

How much? Well, using the last big peak-to-trough cycle as a guide, 7/4/14-6/26/15, port stocks & avg. wkly spot prices fell 30.2% & 35.5%, respectively. Further, since the 7/4/14 peak, stocks/prices shared a 65% correl. Assuming stocks fall just half as much as in the last down cycle, using a simple regression, we est., ceteris paribus, prices could quickly fall back to $61/mt (Ex. 3).

One of the reasons cited for the massive stockpiling of iron ore is that China is planning a vast expansion of its railway network to support growth, with new lines estd. to span >18K miles (link).

However, as Axiom boldly notes, "China’s Massive Railway Expansion Plan ? a Panacea for Iron Ore or Steel Demand."

While this would surely benefit jobs, Axiom estimates with a few assumptions, that the incremental benefit to aggregate steel demand would be a mere 4.8Mmtpa, or just 59bps over 806.7Mmt of estd. "16 production.

How does it get here? Using publicly available data from WAB (NC) as a blueprint (link), assuming avg. weights for: (1) rails are 128lbs./yd., (2) joint bars are 90lbs./pair, (3) track bolts are 80lbs./yd., & (4) spikes are 59lbs./yd., Johnson estimates avg. steel demand of 448mt/mile of track (Ex. 4).

The firm further, and rather aggressively, assumes this expansion is completed in just 3.5yrs & all rail lines are double-track. What’s more, w/ ~90% of steel made in blast furnaces, we est. this incremental steel demand would translate to 6.9Mmtpa of iron ore demand, or just 59bps against an estd. 1,165Mmt of gross ’16 supply (i.e., 141Mmt in domestic output + 1,024Mmt of imports [Ex. 5]).

Bottom line: according to Axiom, both China"s iron ore demand, and the recent price surge, have topped out, especially following recent Beijing summits in which the topic of deflating China"s various bubbles is once again front and center. Finally, the recent downturn in the Baltic Dry Index may suggest that the spot price correction is set to arrive sooner than many expected.