Canada's Gold Rush Needs To Cool Down

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The influence of global climate change has represented a fierce debate within the realms of science and politics for the previous three decades.  Increasingly, the debate has spilled out into other areas, including economics.  As just a one or two degree difference can trigger major changes across the planet, including raising sea levels, the commodities that power our global economy will not go unaffected.  While you'd not think that a hotter or cooler temperature would affect the price of gold -- unlike fuel or crop commodities, where all matter of environmental connections come into play -- the current situation in the Yukon has shown that precious metals feel the influence of climate change.  Warmer Canadian winters are restricting access to pivotal Yukon gold fields, minimizing the outflow of metal from some of the richest mines in all the world.

Rushing Back

Few gold rushes in history prompted greater struggle than that of the Klondike region of the Yukon in 1899.  Even the California gold rush of 1849, for which the NFL team is named, proved less brutal even though the Oregon Trail wagon train migration would ultimately account for an average of one death for every three feet of trail.  The Yukon, as you may well imagine, has such bitterly cold temperatures that mining only became possible for about four months out of the year; those who arrived too late from the 2000-mile path from Vancouver had to either turn back for the winter or suffer through brutal conditions until prospecting could begin again come spring.  Few of the estimated 100,000 prospectors (nicknamed "sourdoughs" by the locals) ever struck it rich; given that Canadian authorities forced them to purchase a year's worth of food to prevent starvation, the gold rush actually brought more wealth to the region than miners would take out.  While the gold rush died down within just a few years, the Yukon remains a fantastically fertile mining region for gold, diamonds, and precious metals, due in no small part to the bare minimum of people living in the region (less than one person for every ten square miles).   The lynchpin of the Yukon's mining regions, however, is an ice road that connects major cities like Yellowknife to the outlying mines in the northern regions.  Given the number of lakes separating the mines from the major cities, these ice roads are the most-traveled in the entire world.  In order to have ice, however, you need cold.

Going Up And Coming Down

2015 proved a paradoxical year: while it reached the dubious distinction of being the warmest recorded year on record, the polar vortex shift of cold air from the Arctic Ocean down through North America created bitterly cold temperatures through much of the United States and Canada.  Most famously, Boston broke their record snowfall with no less than 108 inches, forcing businesses and schools to shut down for days at a time, making it possible for Bostonians to ski down their front street.  The polar vortex affected the frozen north, too: Canada's northern provinces experienced temperatures that were as much as ten degrees colder than the historical average.  While cold temperature makes mining problematic due to the difficulty of breaking through frozen earth, larger ice sheets make transportation easier.  This year, meteorologists predict the vortex will again blow through North America by the end of January.  That may be too late for some Canadian miners who are sweating during this mild winter.  The Tibbett ice road in particular hasn't begun to form any ice, leading to authorities closing the route into the Northwest Territories until the end of January.  While the Canadian Royal Mounted Police expect the ice roads to hit solid mass come March, it's left too many gold suppliers without a way to get their products onto the market.  Echoes of 2006, when the road opened for just 30 days and miners had to spend $100 million in aviation fuel to move their products, make some nervous given the declining value of their product.  As the newly-elected Trudeau government waffles on a $170 million all-season road, there appears to be little hope for the current gold rush until the barometer starts to drop lower and lower below 32 degrees (or in Canada, 0 degrees Celsius).

  • The Takeaway: gold sits at a precarious junction in the first days of 2016.  The Canadian mining output has been minimal at best due to the warmer temperatures in the Yukon and the lack of infrastructure needed to get supplies onto the market.  It's a temporary problem: Canada won't stay warm forever, especially not as January turns to February.  Investors need to understand that gold has a window where it will accrue value due to the isolated Canadian mines, but that window could last as little as a single month before the ice thickens and the road opens.  Consider buying gold for immediate delivery, as short a time frame as you are comfortable with, but be wary about holding on to gold for short-term gain longer than the end of March. 
  • Short-selling gold for delivery come April represents a good idea, not only because a glut of Canadian gold will spill onto the market but also because the tax season tends to swing gold lower as sell-offs become common around April 15th due to need for liquidity.  Gold has had a nice recovery through the early days of January, gaining over fifty dollars per ounce at the time of writing, yet has only posted net gain over three consecutive months just twice in the past two years.  The very real risk that the Fed will reverse the interest-rate hike, furthermore, looms like the sword of Damocles over the head of gold.

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