Chinese hedge funds are out to get you

Summer is supposed to be the season of hard work, when you stake claims and move as much dirt as you can. Winter is when you have time to fret about commodity prices. 

Summer is supposed to be the season of hard work, when you stake claims and move as much dirt as you can. Winter is when you have time to fret about commodity prices.

Unfortunately, this week saw major mayhem in the gold market. Some market-watchers interviewed by the Financial Times even think it was a concerted attack by Chinese hedge funds, who chose not only summer but the middle of the Wall Street night to dump huge amounts of gold onto a sleepy and illiquid market.

Gold went down four per cent on Monday, going as low as US$1,088 per ounce. Early selling in Asian markets was followed by more than US$1.5 billion of our favourite metal being dumped onto the US market just after it opened. US$1,088 is a long way down from 2011’s peak of around US$1,900. Shares in some big-name gold mining companies fell sharply in parallel.

Retail investors seemed to be deserting gold too, with the world’s biggest gold exchange-traded fund recently seeing its biggest one-day outflow of the year: a whopping 11 tonnes of the yellow metal.

Nor is gold alone. BMO Capital Markets reports show that copper has averaged US 81 cents per pound so far this year, below the average for any year since the nadir of the financial crisis in 2009. The same for silver.

Natural gas has averaged US$2.82 per unit so far this year, well below 2014’s level of US$4.39 and less than a third of the 2008 price.

So what does all this mean? The Conference Board of Canada, an Ottawa based think tank, forecasts that the Yukon economy will shrink by 3.4 per cent in 2015. That’s on top of shrinkage in 2013 and 2014.

A recession is traditionally defined as two quarters of negative growth. Shrinking three years in a row definitely counts as tough economic sledding.

The pain is centred on the mining industry. With Wolverine closing and Minto’s North project delayed, mining production is forecast to fall a vertiginous 23.7 per cent in 2015. That’s also the third year in a row for falling mineral production.

The conference board notes that, in case you hadn’t noticed, the government is spending as fast as it can on schools, hospitals and infrastructure to make up for the private sector slump.

The conference board is more bullish on 2016 and later in the decade, expecting that the Minto mine will increase production and that Victoria Gold’s Eagle mine will come on stream.

Of course, you should take anyone’s economic forecasts with one-tonne super sack of salt. I’m not sure who relies on the conference board forecasts to actually make any decisions. In an economy as small as ours, it only takes one mine opening or closing to dramatically alter the numbers.

It’s too bad the conference board report doesn’t include a list of their past forecasts and how they turned out. Local economists are still chortling about their prediction for 3.7 per cent growth in 2014 (as noted above, the economy actually shrank that year).

But they are brave souls. They even forecast our economy out to 2030. In 2025, they predict a sharp Yukon recession, worse than anything we’ve seen since 2007. But then growth in the 2-3 per cent range from 2027 to 2030.

Put it on your fridge so you can remember to short a few mining companies in 2024.

Economic forecasting is highly speculative this far out. The conference board is on safer territory when it looks at our demographics. Despite our long winters, it turns out Yukoners are not having enough babies to replace the current population. Our replacement rate is just 1.6 children per woman.

As a result, in 10 years, the share of our population over 65 years is expected to double.

That is the trend behind the Yukon government’s recent announcement that it was “modernizing” the Pioneer Utility Grant. “Modernize” means “cut” in guv-speak, and the Pioneer Utility Grant has gone the way of the Beringian Yukon camel for well-to-do Yukon seniors.

The Yukon government doesn’t need the money today, but its policy analysts are probably worried that the cost of such programs will go up sharply in the future, in parallel with the number of senior voters who like them.

The conference board’s most shocking forecast isn’t mentioned until page 45, where they predict that transfer payments will rise at only 2.8 per cent annually in coming years. That’s half the rate of around 6 per cent we’ve enjoyed since 2004-05.

If you thought having Chinese hedge funds out to get you was bad, this is far worse.

The cost of the existing government machine goes up a few per cent every year, thanks to inflation plus wage increases and increasingly expensive health-care and pension commitments for existing staff. If the transfer payment goes up at just 2.8 per cent a year, that leaves little extra to hire new government workers or spend more with local businesses. Both of these have been important drivers of Yukon economic growth in recent years. This in turn means lower population growth, which has knock-on effects on future transfer payments and the price you’ll get for your house when you retire.

That’s probably enough depressing reading. Time to change to something more cheery like Game of Thrones, where only half of your favourite characters die gruesome deaths?

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s Yukonomist show or Twitter@hallidaykeith