Gold Market Radar (May 6, 2013)

Saturday, May 4th, 2013

Gold Market Radar (May 6, 2013)

For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.

Strengths

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• For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.
• INK Research reports insider buying on the TSX Venture exchange is nearing record highs, led by the mining sector. The company’s proprietary insider buying indicator hit 715 percent, meaning there are seven stocks with insider buying for each stock with insider selling. The recent surge bodes well for mining junior stocks as the insider buying indicator correctly foreshadowed the recovery in prices following the 2008 crash says David Kwan of Salman Partners. It appears physical gold buyers are not the only gold bulls in the market today.
• During a recent panel discussion David Franklin of Sprott and Frank Holmes discussed the recent sell off in gold and agreed that gold sentiment has bifurcated with financial buyers reducing their allocation to gold while physical investors have increased their purchases. As a result, Frank stated that as uneducated buyers get shaken out of the market, and educated buyers jump in gold, ownership is effectively transferred from weak hands to strong hands.

Weaknesses

• Evy Hambro, manager of BlackRock’s commodities funds was very critical of recent gold stocks performance at a private event in London this week. Hambro placed the blame on poor execution on the part of managers, and noted their poor job at delivering value to shareholders. These comments are not new, but they do serve to remind investors of the difficulty in picking the best stocks among an industry with rapid rising costs, recent weak pricing, and high execution risk.
• The reporting season started with some previous underperformers confirming their status. Newmont Mining disappointed with its high costs and lower grades which make its full year cost guidance now difficult to achieve. Goldcorp also battled lower grades as it announced lower by-product numbers at Penasquito. Kinross anticipated its reporting to announce its widely expected prefeasibility study of Tasiast. The project has only an 11 percent internal rate of return at $1,500 dollar gold. No sensitivities were given to see what could happen in a bad pricing scenario to a project that has already seen multi-billion dollar write-downs. And lastly, George Topping of Stifel Nicolaus shared the news that Barrick/Goldcorp’s gold exports from Pueblo Viejo in Dominican Republic apparently have been halted againas the companies are reportedly required to pay an unsubstantiated and unlikely $992 million in fines and penalties.
• New Gold Inc. reported weak earnings this week. The company missed earnings and production guidance based on lower than expected production from its New Afton mine as low grade open pit waste material had to be removed to reach the high grade ore. The company also reported lower production at CSP and Mesquite based on lower grades at the leach pads.

Opportunities

• A symbolic change in sentiment happened this week as Allied Nevada was able to complete a bought deal this week led by Dundee Securities. Dundee Securities President Ned Goodman is a widely respected in the mining industry and his company stepped up and raised equity for a gold company amid negative investor sentiment. The deal, valued at $150 million is by no means small, and demonstrates capital markets are healthier than initially thought; at least in the presence of strong leadership with a proven record of success.
• The Arizona State Senate approved legislation to make gold and silver coins legal tender in the state. The bill was eventually vetoed by the Governor who cited the lack of coordination with Federal agencies tasked with overseeing these transactions for her inability to pass the legislation. Despite this fact, it has become evident there is a lack of confidence in the monetary system. The push to establish gold as currency in the United States has become increasingly popular, with more than ten states currently drafting similar legislation.
• The addition of two words to the latest Federal Open Market Committee communication issued on Wednesday has given us more reasons to believe the Fed is not likely to taper purchases as early as some economists anticipate. The sentence now reads that not only is the Fed ready to reduce asset purchases when it deems it necessary, it is now also ready to increase those purchases to maintain appropriate policy accommodation. The correlation between the size of the Fed’s balance sheet and the price of gold continues to be strong despite a recent divergence. Further easing, even the sole possibility of it, should bode well for gold prices.

Threats

• Dundee Capital Markets studied the three-year annualized percent increase in per tonne costs for 99 mines around the world. The results are staggering; their estimates talk of a median annualized rate of cost inflation of 11 percent over the last three years. It is evident mining cost inflation is widespread, but when comparing these costs with a 2 percent annual CPI, one can conclude costs are out of control. With gold prices showing weakness in recent months, margin compression is a genuine threat for those companies that cannot control their cost inflation.
• Dundee Capital Markets also looked at the recent developments that have changed the fiscal risk panorama for both seniors and juniors in the space. The regulatory instability of developing countries is not at all surprising, with at least eight documented cases of added fiscal pressure to miners. Countries such as Ghana, Romania, Senegal, and Armenia among others increased or sought to increase royalty payments from miners in the last 12 months. As if these risks were not enough, traditional mining friendly jurisdictions in developed countries have also turned their back on miners recently. Australia’s super profits tax, Nevada’s proposed changes to royalty rates, and Quebec’s potential windfall tax, and Mexico’s recently discussed new royalty system are only a few of the frontal attacks miners have been subject to in recent months.
• Financial media outlets have convinced investors that the gold sell off in mid April is broad based and that gold has lost its fundamental value. An interesting report was published this week in which it became evident that only a few players have parted with their physical gold in the last three months. What is most interesting is the fact that JP Morgan accounts for 99.3 percent of the gold delivered in the Comex market since February 1. This is the same bank that was investigated in connection with a possible silver price manipulation after whistleblowers alerted the Commodities Futures Trading Commission in November 2009. Back then it was speculated that the bank was acting as an agent of the Federal Reserve, holding down the price of silver, to buoy confidence in the U.S. dollar.

Tags: Gold, Gold Equities, Gold Market
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Gold Market Radar (April 29, 2013)

Monday, April 29th, 2013

Gold Market Radar (April 29, 2013)

For the week, spot gold closed at $1,462.09 up $58.24 per ounce, or 4.15 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.15 percent. The U.S. Trade-Weighted Dollar Index lost 0.30 percent for the week.

Strengths

• On Friday last week, the Chinese Gold & Silver Society in Hong Kong reported it had sold out of all of its spot gold and placed orders to Switzerland four times larger than normal to keep up with demand. On Monday, the U.S. Mint suspended sales of its smallest American Eagle gold coin after it sold off all of its inventory. The surge in gold demand in Turkey is causing delays in coin deliveries by the Istanbul-based mint, while Standard Chartered Plc said its gold shipments to India last week exceeded the previous record by 20 percent.
• Gold is not in a bubble according to Commerzbank’s strategists. Their latest chart plots gold starting in 2002 together with crude oil starting in 1998 and tech stocks from 1990. In their discussion they note that immediately following their record highs, both tech stocks and oil went on a sharp decline. Within nine months, tech stocks had halved in price, while it took only three months for oil to lose half its price. The picture for gold does not resemble these two events; after 19 months from its peak, gold has fallen only about 25 percent. A comparison between the current situation in gold and the former bubbles is superfluous at best, in their opinion.

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• Alamos Gold reported its first-quarter 2013 results earlier in the week to the delight of many mining analysts. The company beat analysts’ expectations on both top and bottom line, and grew its production to 55,000 ounces of gold from 40,500 ounces in the same quarter last year. Furthermore, the company is currently boasting an 8.76 percent free cash flow yield. A company with strong free cash flow yield can build its business through paying off debt, making acquisitions, or returning money to shareholders. In this case, the company announced a stock repurchase of 10 percent of its float over the next 12 months. Even though the company trades at a premium to most junior producers, its low cost profile, cash generation and self-funding capabilities, as well as its discipline in returning capital to shareholders fit our growth at a reasonable price (GARP) model rightly.

Weaknesses

• Following the atrocious sell-off in commodities that caused so much market chaos last week, commodity funds lost 1.3 percent of total assets under management to redemptions; precious metals funds alone recorded $2.3 billion in outflows. That is 11 straight weeks of outflows from precious metals funds, the longest streak on record according to BofA Merrill Lynch strategist Michael Hartnett.
• Harmony Gold reported an underground fire at its Phakisa mine which left one employee dead and led to a halt at two operations that account for 19 percent of its output. The last official report stated the cause of the fire is still unknown and the efforts to extinguish the underground blaze are ongoing.
• Technical analysts have resumed the calls on gold to fall further following the price recovery over the last week. It looks like gold has broken below the trend line from the 2008 low in Auerbach Grayson’s modeling. Its belief is that gold can fall to $1,150 based on a purely technical analysis. While we commonly use this type of analysis as part of our investment recommendations, we believe conclusions stemming from these studies must be backed by adequate fundamental analysis. As of late, we believe the majority of the technical analysis commentaries calling for gold falling further do not have convincing fundamental support.

Opportunities

• The Swiss Peoples Party launched an initiative to prevent the Swiss National Bank from selling any of its gold reserves and to force it to hold at least 20 percent of its assets in the precious metal. The initiative has gathered the required 100,000 signatures necessary for a national referendum, the government said last week. At the end of 2012, the SNB’s gold reserves represented around 10 percent of its total assets.
• Barrick Gold’s shareholders openly criticized the firm’s executive compensation arrangements at the company’s annual general meeting in Toronto on Wednesday. The criticism was exacerbated by the board’s decision to pay $17 million to newly appointed co-chairman John Thornton. The company lost more than $10 billion of its market capitalization in 2012 and has lost nearly 50 percent of its market capitalization so far this year. Despite the fact that the compensation vote is non-binding, we welcome this type of shareholder activism and its intention of tackling a problem that has become endemic in the gold mining industry.
• On May 11, the Colombian government will revert to the previous mining code under which most current mining licenses were granted. The move comes as the constitutional court failed to revalidate the new mining code proposed in 2011. The government will now have to decide whether it stays with the old code, which proved friendly to foreign investment and saw exponential growth in the domestic mining industry, or drafts a new code and takes it through the legislative process. While we admit this process will bring some political uncertainty to the sector in the short term, we see an opportunity for the government to allow mining companies to operate under the old code while it drafts a proper, well-documented mining code to be implemented prospectively. The move may also prove vital to unlocking the moratorium on mining licenses the central government has had in place since 2011.

Threats

• U.S. inflation may appear low for historical standards at 1.5 percent, but this is not stopping it from eroding citizens’ real wealth. On Friday, the yields of U.S. Treasuries up to the seven-year term closed below the inflation rate, which is effectively the same as paying the government to accept your loan. This is especially worrisome for savings and pensions that will barely, if at all, struggle to offer positive real returns. But the story is also affecting workers, as the Wall Street Journal reports wages are rising at a rate of 0.5 percent a year, much lower than the pace of inflation. In times like this, investments in hard assets, and especially in gold, could be beneficial for their inflation protection features.
• Political instability has returned to the young nation of Kyrgyzstan as local nationalists threaten to return to the streets to topple yet another government unless Prime Minister Zhantoro Satybaldiyev agrees to expropriate Centerra Gold’s Kumtor gold mine. The nation’s parliament has set a June 1 deadline to renegotiate or repudiate the 2009 agreement under which Centerra is operating the mine. The company currently pays a 14 percent gross revenue royalty to the country, which in 2011 accounted for 12 percent of the country’s GDP. Despite the strong pressures by the nationalists, the office of the Prime Minister remains committed to resolving the issue without dashing the country’s hopes of attracting more foreign direct investment.
• Kitco contributor and leading precious metals commenter David Levenstein notes in his last piece that it has become abundantly clear that the price decline in gold last week was engineered by speculative action on the futures market of Comex. Furthermore, he commented on how this artificial manipulation of paper gold has nothing to do with the physical market, which is skyrocketing. Eventually, this will lead to a major dislocation in the price of the physical and the price of the paper markets, with the risk being that some issuers of paper gold will not be able to deliver the promised bullion.

Tags: Gold, Gold Market
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Gold Market Radar (April 22, 2013)

Monday, April 22nd, 2013

Gold Market Radar (April 22, 2013)

For the week, spot gold closed at $1,403.75, down $79.25 per ounce, or 4.02 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 11.30 percent. The U.S. Trade-Weighted Dollar Index rose 0.56 percent for the week.

Strengths

• You were wrong if you thought the drop in gold prices reflected lower consumer demand. The fact is the U.S. Mint’s sales of gold coins soared this week following the price plunge. On Thursday, the Mint reported sales of 153,000 ounces of gold coins, the highest in nearly three years, twice as much as sold in March, and seven times the volume sold this same week last year.

• The price drop also provoked clamor in the love trade countries. In the Zaveri Bazaar in Mumbai, India’s largest bullion market, demand in recent days was the most this year according to the All India Gems & Jewellery Trade Federation. Further east, Hong Kong and Macau gold merchants saw a 150 percent increase in sales last weekend, while consumer traffic rose 40 percent from a week earlier.

• The buying this week was not only reserved to consumers in Asia. John Paulson reaffirmed his belief in gold and reiterated his commitment to his gold holdings. From Manila, Christopher Wood noted on his latest Greed & Fear report that he is personally taking the opportunity to increase bullion holdings in his pension portfolio. He is reportedly adding another 5 percentage points to his physical gold holdings and suggests adding more if there is another dip.

Weaknesses

• The “tax” attack on gold companies continues. Following the Canaccord Genuity report criticizing the increase in bureaucracy and significant permitting delays mining companies have faced in Mexico since President Pena Nieto took office in December last year, the country’s lawmakers expeditiously approved a new 4 percent mining royalty tax on net profits. It is clear the proponents of the law have not been watching the news recently since they argue mining companies are highly profitable and have been reaping all the benefits for years. We believe the move will only serve to hurt Mexico’s hard-earned reputation as a friendly mining jurisdiction.

• Macquarie’s Equity Research continued the trend of stress testing gold producers’ balance sheets with ever lower gold price forecasts. The conclusion is that most companies that are currently engaged in the development of uber-large projects will likely be forced to defer capital expenditures or abandon projects altogether. Smaller caps without significant current production will likely bear the biggest burden as they likely have less flexibility to defer capital expenditures and some will unequivocally go out of business. However, Macquarie notes fully funded growth names such as Alamos Gold will continue to be profitable even in a sustained $1,200 per ounce gold environment.

• In 2004, gold ETFs held 0.5 million ounces. This number rose to a peak of 84.6 million ounces in December 2012. Since then, gold ETFs have liquidated 8.6 million ounces or roughly 10.2 percent of their holdings. The speculative short positions on Comex gold have receded from their February peak; however, they still stand just under 10 million ounces, levels not seen for nearly a decade. We believe it is important for investors to understand the volume of speculative flows in the gold market that create unwarranted volatility and, at times, hide the fact that gold fundamentals remain unchanged.

Opportunities

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• Following Monday’s price action on gold our team analyzed the recent moves from a statistical perspective. Year-over-year going back 10 years, gold’s move is a -2.6 standard deviation (sigma) change. This price action puts the price of gold in uncharted territory because out of a total of 2,610 trading days, there has only been one such occurrence and that was precisely on Monday. The likelihood of such an event happening is 0.04 percent of the time (1/2610 = 0.04 percent). On a 60-day basis going back 10 years, gold is down 3.2 sigma. By applying the concept of mean reversion, it is quite likely that gold will rebound strongly from these levels.
• Further to our analysis, Nick Pocrnic of Stifel Nicolaus reported this week on the unprecedented price action of gold as measured by the SPDR Gold Shares ETF (GLD). The two-day (Friday and Monday) move in GLD was -16.65 at the time of his writing, which can be converted to over 8 standard deviations. He strongly believes we will not see a similar trading action in our lifetime, based on statistical analysis. He states this fall will go down in history as an aberration of truly historic proportions. As Gartman noted to put it into perspective: the sun is expected to burn out first before we see a move like that again.
• The news that Cyprus would sell a part of its gold reserves as part of the bail-out process made many rounds around the world. What didn’t make as many rounds in the news were the comments by the South Korean and South African central banks stating gold is a key part of their international reserves they are not willing to forgo. The Sri Lankan central bank went further and declared it was looking at the price action as an opportunity to increase its bullion reserves. We are of the opinion that Sri Lanka is only one out of a large number of nations looking at buying the dip to add gold reserves.

Threats

• The fall in bullion prices over the last few days can only be described as panic selling according to Sprott Group. Money managers and veteran traders know that when panic sets in, investing logic drops by the wayside and money begins to flow one direction only. This selling in turn acts to drive prices lower, which in turn forces those holders on margin to liquidate their positions. This process leads to even more selling as the pain of holding levered “under water” positions becomes too great, causing traders to liquidate their positions. Despite the risk that this type of selling represents to the gold industry, unlevered long term fundamental investors should not be directly affected as the panic selling cannot last forever. We believe once the panic selling is over, gold will begin a slow but strong upward trend to levels that reflect its fundamental value.

• Never has it been more clear that “paper” gold and physical gold are two different assets, and rarely do we get the opportunity of demonstrating that physical gold is effectively a currency, a relatively safe currency, while paper gold is a financial asset subject to market speculation. As Jim Rickards noted on Friday, if you were a holder of physical gold on Monday, you saw the quotes falling on your screen, but when you turned around to your vault you held the same number of ounces of gold. If you owned the GLD ETF over the same trading day you would have seen your dollar trading account decreasing every minute. We are of the opinion investors are being misled into purchasing paper gold such as futures or ETFs thinking they offer the same inflation protection as bullion purchases; these behave like financial assets and pose a threat to physical gold’s claim as a safe heaven.

• Given the increasing talk of paper gold and physical gold, we would like to revisit last week’s news by ABN AMRO bank. As we reported, the largest Dutch bank sent a letter to customers stating the bank would be unable to deliver physical gold on customers’ gold claims and would instead offer a paper gold claim to its customers. The bank made the paper gold claim appear as valuable as the physical gold claim without telling investors the new “product” was subject to the bank’s credit risk, as well as to market speculation. We continue to believe this in just one of the many deliberate actions to make paper and physical gold appear like one and the same, something that mistakenly puts physical gold’s safe heaven credibility in doubt.

Tags: Gold Market
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Gold Market Radar (August 20, 2012)

Sunday, August 19th, 2012

Gold Market Radar (August 20, 2012)

For the week, spot gold closed at $1,616.05 down $4.15 per ounce, or 0.26 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.14 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.05 percent for the week.

Strengths

• Despite the dollar’s steady rise since the start of the summer, the gold price continues to defy efforts to push it lower.  Technically, gold has now traded above both its 50- and 100-day moving averages and the seasonally strong autumn rally in gold could well play out again this year.
• Gold sentiment likely got a boost when recent filings showed billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.  In addition, the $25 billion Soros Fund Management LLC portfolio also made a sizable increase in its exposure to bullion. The Soros Fund, based in New York, raised its existing weight by slightly more than 175 percent from the previous filing.  And finally, investment funds in China soon plan on launching the country’s first batch of gold exchange-traded funds, according to the state-run Shanghai Securities.
• Nomura International Plc told clients that the gold price is “not heavily pricing in QE3,” referring to so-called quantitative easing.  “The potential upside, were QE3 to be introduced, would likely far outweigh any potential downside.  Even if it is not introduced, real rates remain very low and the gap between them and gold is large.”

Weaknesses

• Great Basin Gold announced this week that CEO Ferdi Dippenaar has resigned with immediate effect. This is due to a strategic review process begun as a result of delays at the group’s Burnstone operation in South Africa.  On release of the news the stock tumbled 50 percent.  In recent months, both Aaron Regent and Tye Burt, CEOs of Barrick and Kinross, respectively, also have been shown the door during these tough times for gold miners.
• Clive Johnson, the president and CEO of B2Gold Corporation, expressed his frustration on the company’s quarterly conference call with regards to the difficulty of trying to get distressed companies to come to the table for a potential acquisition.  Johnson noted the self-interest of management versus the shareholders was clearly evident in that many companies either are unwilling to sign confidentiality agreements or, if they are, they come with caveats – shackles in the form of standstill agreements – that make it tough to do anything.
• The World Gold Council (WGC) recently reported that gold demand reached 990 tonnes in the second quarter, down 7 percent from a year ago. The weaker trend in investment, jewelry and technology demand for gold was compensated by the Central Banks’ surging appetite, which led to the largest quarterly increase since the second quarter of 2009. Though both China’s and India’s gold consumer demand declined year-on-year in the second quarter, retail investment demand ex-China and India actually rose 16 percent. In particular, the European purchase of bullion bars and coins rose 15 percent, revealing investors’ demand for gold for capital preservation in light of the European debt and banking crises. The WGC highlighted that Russia will continue to be a driving force in the gold market. It is now the fourth largest consumer of gold jewelry, and has the world’s eighth largest gold reserves.

Opportunities

• David Prowse, Metals and Mining Specialist Sales at Bank of America Merrill Lynch, recently visited a number of accounts in New York and Boston.  David reported that he was perhaps halfway through the second day before a single investor had mentioned gold or gold shares. It has essentially been a year since gold peaked last August and few have interest in the shares these days making it that much easier to pick up a reasonable position without much market impact.
• Barron’s also carried a technical analysis of gold bullion versus the gold stocks this past week.  The publication noted that for the first time in more than two years, gold stocks are looking better than the metal, although they are not yet fully in bullish mode.  Barron’s pointed out that the desire to sell gold stocks versus gold itself reached a climax in May and since then the short gold stock trade looks to have washed out, perhaps establishing a price floor, and making their risk/reward profile look fairly good
• Since February, the COMEX speculative position on silver has fallen by 72 percent.  A survey of hedge funds showed they are the least bullish on silver in almost four years.  However, physical holdings of silver via exchange-traded products has climbed for three months and is now valued at $16.2 billion. In the coming weeks, the Jackson Hole Fed retreat may be the last chance the Fed has to act before the presidential election.

Threats

• Platinum producers in South Africa, which account for 75 percent of world output, are facing plunging profits, surging energy costs, and labor instability.  Lonmin plc has been at the epicenter of the crisis.  The labor unions have been the nucleus of the problem where the Association of Mineworkers and Construction Union (AMCU) has been targeting the platinum mines to extend its membership at the expense of the established mining unions, the NUM and Solidarity which are nowadays seen by some as part of the mining establishment.  Several murders took place between the rival factions so police were called in.  Unfortunately the conflict escalated with 34 deaths at the Lonmin Mine.
• Some believe David Rosenberg of Gluskin Shelf to be a perennial bear but he’s pretty much one of the few strategists who is willing to mention the bad news and bare the disdain of those who want us to keep the rose-tinted glasses on.  Dave noted this week that the spike in food and gas prices casts a cloud over the back-to-school shopping season.
• With regard to investors’ appetite for income-producing securities versus taking the risk of parking cash in the equity markets and trying to sleep at night, Mr. Rosenberg pointed out that that retail investors eagerly snapped up nearly one-third of the largest municipal debt deal of the year, a $10 billion one-year bill issued by California with a range of 0.3 to 0.55 percent.

Tags: David Rosenberg, Dippenaar, Dollar Index, Exchange Traded Fund, Exchange Traded Funds, Gluskin Sheff, Gold Exchange Traded Funds, Gold Market, Gold Miners, Gold Price, gold stocks, Great Basin Gold, India, John Paulson, Market Radar, Nomura International Plc, Nyse Arca, Price Of Gold, Qe3, Rosenberg, Rosie, Russia, Sizable Increase, Soros Fund Management, Soros Fund Management Llc, Spot Gold
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Gold Market Radar (August 13, 2012)

Saturday, August 11th, 2012

Gold Market Radar (August 13, 2012)

For the week, spot gold closed at $1,620.20 up $16.42 per ounce, or 1.04 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.05 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.22 percent for the week.

Strengths

• Merger and acquisition activity is picking up.  On Monday, Australia’s Silver Lake Resources said it will acquire Integra Mining in an all-scrip deal to create a gold miner with a market value of nearly $1 billion.  The combined companies would create a gold producer with a 6.6 million ounce resource base, with current production of 200,000 ounces projected to more than double in 2014.
• Endeavour Mining’s announcement that it plans to acquire Avion Gold sent Avion’s shares up 20 percent.
• Overall, few companies have reported positive dynamics with their second-quarter updates.  However, Randgold is certainly the exception and reported group gold production of 210,534 ounces of gold in the quarter, a 27 percent increase over the first quarter and a 14 percent rise over the second quarter of 2011, and with a pleasant decline in total cash costs to boot.  Randgold Resources, under the leadership of Mark Bristow, is well on its way to becoming a Tier 1 gold miner and its latest milestone is the official opening of its Gounkoto mine in Mali.  Capital cost to develop the mine was repaid in less than a year.

Weaknesses

• Roy Sebag of Natural Resource Holdings compiled a report showcasing the rarity of +1 million ounce gold deposits.  Of the 439 mines or deposits identified, 189 were identified as producing mines owned by companies.  This left only 250 undeveloped deposits but the declining quality of available resources was also shown. There is a 37 percent drop in grade between that of producing mines as compared to undeveloped deposits. Higher gold prices will be needed to bring these projects into production.
• In a story published Sunday, the Financial Times stated, “A four-year investigation into the possible manipulation of the silver markets looks increasingly likely to be dropped after U.S. regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation.” One analyst we spoke to commented that regulators in the U.S. are much more interested in prosecuting foreign banks for any misdoings.  Potential charges against Goldman Sachs in relation to the mortgage-backed securities scandal were also dropped this week as the Justice Department backed off the case.  However, HSBC, Barclays, and now Standard Bank are being pursued on changes ranging from money laundering of the drug trade, fixing interest rates, to allowing illegal trade with Iran.
• Sentiment towards the junior miner space is still weak, at least for the roughly 1,000 prospectors attending the Diggers and Dealers conference in Australia, which has made its industry uncompetitive with taxes and regulation.

Opportunities

• Silver stocks outperformed their golden peers this week.  The catalyst was likely the recent fully subscribed $200 million offering of new units by the Sprott Physical Silver Trust and with the associated green shoe being fully taken up by the underwriters.  What this means is Sprott will be in the market looking to acquire some 8 million plus ounces of physical silver to fulfill the mandate of the trust.  When Sprott launched the Physical Silver Trust securing 15 million ounces, it took a full three months before delivery of the metal was received and, according to Sprott, some of the delivery had not even been mined when the order was put in.
• Draft Russian legislation could facilitate foreign mining of gold and other precious metals within its borders.  Undoubtedly, the Russians have realized their overly protective restriction of excluding foreign companies from mining significant gold deposits means that the gold is unlikely to get mined. The draft bill would allow foreign-owned businesses to mine deposits of up to 250 tons (about 8 million troy ounces) of gold, five times the existing cap of 50 tons set in 2008, without facing additional regulation from the state, the documents showed.  Another important measure is the suggestion that a discoverer of a strategic deposit could proceed to mine development without the threat that the government could withdraw the license. This should spur more mineral exploration.
• Jamie Sokalsky, the new CEO of Barrick Gold, showed some confidence on his expectations of a turnaround at the company when he acquired 50,000 shares of his own stock through open market purchases recently.

Threats

• Niall Ferguson recently penned an essay on the “Stationary State” of the U.S. economy.  The mood disorder is especially bad for investors. Only seven out of 47 national stock markets around the world have posted gains in the last 12 months.  Ferguson noted that the U.S. economy has created 2.6 million jobs since June 2009.  In the same period, 3.1 million workers have signed up for disability benefits.  Back in 1992 there was one person on disability benefits for every 36 people in employment. Now the ratio is 1 to 16. Unemployment is being concealed—and rendered permanent—in ways all too familiar to Europeans.
• Nikos Kavalis, an analyst at RBS, noted he was struggling to see where the kind of volumes of investment in gold that we got in 2009 and 2010 are going to come from.  Even if there is another round of quantitative easing he feels we are getting close to game over for gold as a lot of investors are reluctant to expand positions.  Analyst Robin Bhar of  Societe Generale shares Nikos’ disillusionment. “What’s the upside to gold with more QE? Maybe $1,800 – certainly not new highs,” he commented.
• More trouble for the platinum miners were hinted at this week as the Department of Mineral Resources in South Africa is said to be contemplating having the miners re-up the ownership stakes that were lost by certain Black Economic Empowerment partners that had margin calls, due to being financially extended, and were forced to sell down their ownership stakes.

Tags: Acquisition Activity, Combined Companies, Endeavour Mining, Gold Deposits, Gold Market, Gold Miner, Gold Miners, Gold Prices, Gold Producer, Gold Production, gold stocks, Lake Resources, Mali Capital, Mark Bristow, Market Radar, Merger And Acquisition, Nyse Arca, Randgold Resources, Resource Holdings, Russia, Spot Gold, Sprott
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Gold Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Gold Market Radar (August 6, 2012)

For the week, spot gold closed at $1,603.48 down $19.42 per ounce, or 1.20 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.04 percent. The U.S. Trade-Weighted Dollar Index slid 0.48 percent for the week.

Strengths

• Central bank buying of gold continues to be a strong theme.  This week the Bank of Korea, which has the world’s seventh biggest foreign exchange reserves, announced it had purchased 16 metric tons of gold last month, increasing reserves to 70.4 tons. Central banks and the International Monetary Fund (IMF) are the largest bullion owners with 29,500 tons at the end of last year, or 17 percent of all mined metal, World Gold Council data shows.  Central banks have been net buyers for two straight years, the Council said.  Purchases this year will probably exceed the 456 tons added in 2011, the Council estimates.
• Although gold was down for the week we think the price action was positive.  Gold was down somewhat when the strong ADP jobs number came out on Wednesday morning, and then gold initially declined further after Federal Reserve Chairman Ben Bernanke held off on announcing new stimulus measures.  The selloff did not last long before buyers came back in and scooped up the metal.  The simplistic trade of shorting gold on no new Bernanke announcement for another round of quantitative easing has become quite crowded.
• Although global gold mine production has fallen -2.9 percent year-to-date and has registered year-over-year declines for eight months running may sound like bad news, and it has been for certain gold producers, this is certainly a positive for those companies that have maintained or grown their production.  Despite the 11 years of consecutively higher gold prices, gold production has been flat and this should bode well for higher prices in the future.

Weaknesses

• Kinross Gold replaced CEO Tye Burt this week.  This is the second senior gold company CEO to have been removed by their boards in the past month.  The replacement CEO is J. Paul Rollinson, a long-time associate of Mr. Burt. Mr. Rollinson is also a former investment banker, with a geology and engineering background.  In general, analysts lamented that they would have preferred a high profile manager with a proven track record of operating and/or building mines and/or turning companies around.
• Standard & Poor’s has downgraded Barrick Gold from “A-” to “BBB+” with a negative outlook.  The rating agency’s negative outlook on Barrick “reflects our view that the execution risks surrounding Pascua-Lama could potentially stretch the company’s credit measures and free operation cash flow generation beyond the levels we have assumed within our base case scenario.”
• The Indian market is still seeing no relief as the rupee remains weak, the arrival of the monsoon season has been disappointing and the multi-state electric grid collapse last week caused widespread blackouts across the region, obviously curtailing near-term economic activity.

Opportunities

• Nick Holland, CEO of Goldfields Ltd., recently addressed the Melbourne Mining Club and covered a 35-page presentation surveying all the things that gold miners have been getting wrong over the last decade and offering a few ways to solve some of them.   Nick Holland pointed out that one theme has run through the presentations of large gold producers at investor conferences over the last 15 years is that production is going to increase and this will result in the company increasing its earnings.  Nick notes that if the gold industry had actually met all its production promises over the last five years, then it would not have dropped output on a compound annual basis by 2 percent between 2006 and 2011.  Unfortunately gold miners have not met their production promises and investors have become skeptical.
• Nick also highlighted that gold miners need to think differently about costs.  “Who are we trying to kid?  We don’t kid the investors because they know how much cash we really generate after everything is accounted for.  The sell-side also understands this.  The only people we’re kidding are governments and communities, who, not surprisingly, say, okay, you’re making super profits, please pay up.  And before we know it we have windfall taxes, higher royalties and so on.  We’ve got to change the lens through which we and the world view this industry, and start talking about what it really costs to produce an ounce of gold.  I don’t care if we call it NCE or something else, but to talk about cash costs only is not telling the full story.”  We view this type of examination of the industry as a strong positive for management to take full notice of and start delivering on what the investor is expecting from gold mining companies.
• Bank of America Merrill Lynch noted that while the Federal Open Market Committee (FOMC) did not take any easing action at its current meeting, under its forecast, the economic data should weaken enough by the September 13 FOMC meeting to convince most Fed officials to support more QE and extend the forward guidance then.  But the call on further Fed easing remains very dependent on the path of incoming data.  We think only a small portion of recent gold buyers entered with the expectation of a Fed move this week but it is more likely a greater number are looking toward the Jackson Hole meeting at the end of August, and then the September FOMC meeting as key entry points into the gold market.

Threats

• While most governments are outright buyers of gold, Vietnam’s government has a different view on gold.  The problem is nobody wants to use their local currency, the dong but instead more and more rely on gold to settle transactions.  The Vietnamese people have a huge affinity with gold, but the country’s government is taking major steps to restrict the gold market and the practice of replacing the dong with gold in transactions.  These restrictions included banning gold as a medium of exchange and issuing seven directives which are designed to reduce “goldization” the practice of replacing the dong with gold in transactions.
• David Rosenberg, of Gluskin Shelf, pointed out that U.S. investors withdrew a net $11.5 billion out of equity funds in the prior week according to the Lipper data that includes ETFs, the sharpest outflow in two years.  Taxable bond funds attracted over $3 billion and that brings the year-to-date tally to $151 billion as the secular shift in investor behavior towards income-generation continues apace.
• Baby boomer investors looking forward to retirement have been burned by the tech bubble, the housing boom and ensuing credit crisis. Much of the shift in money flows has been to extreme risk aversion and government bonds have been the choice for the safety.  Unfortunately, the market has the uncanny ability to move in a direction that will disappoint the most investors.  It is unlikely, given the rising debt burden of governments, that the masses will be rewarded for seeking safety in bonds for the next five years. Under owned assets which are out of favor, such as gold, deserve some consideration for portfolio diversification.

Tags: Central Banks, Company Ceo, Dollar Index, Federal Reserve Chairman, Foreign Exchange Reserves, Gold Company, Gold Market, Gold Mine, Gold Miners, Gold Prices, Gold Producers, Gold Production, gold stocks, International Monetary Fund, International Monetary Fund Imf, Market Radar, Nyse Arca, Selloff, Spot Gold, World Gold Council
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Gold Market Radar (July 30, 2012)

Sunday, July 29th, 2012

Gold Market Radar (July 30, 2012)

For the week, spot gold closed at $1,622.90 up $38.40 per ounce, or 2.42 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.36 percent. The U.S. Trade-Weighted Dollar Index slumped 1.00 percent for the week.

Strengths

• Agnico-Eagle Mines was one of the few upside surprises this past week, finishing with a price gain of 15.1 percent. The company showed continued strength in its second quarter results and upped 2012 production guidance while its peers did the opposite.
• Randgold Resources reported that initial mining was underway at its massive Kibali gold project in the Democratic Republic of Congo (DRC). The company reported excellent progress and initial pit stripping on one of Africa’s potentially most challenging gold megaprojects at Kibali in the DRC. Randgold, the operator and 45 percent partner in the project with Anglogold Ashanti, envisions the current life of mine plan to average production of approximately 600,000 ounces of gold per year for the first 12 years, with an average grade of 4.1g/t.
• Mineweb reported that Hong Kong’s largest gold storage facility, which can hold about 22 percent of the bullion now in Fort Knox, will open in September to meet rising demand from banks and the wealthy. Hong Kong is emerging as a very important center for gold, especially because it acts as a doorway to China. The current list of hubs include New York, Zurich and London, but there is a growing demand to set up an Asian hub for physical gold storage as wealth departs socialist countries.

Weaknesses

• Australian mineral drilling companies are looking to pack up shop and head to Africa and other regions in response to the collapse in new mining development in Australia. The Gillard government policies have decimated the local mining industry. Earlier in the week, Deloitte Access Economics predicted the mining boom would last only another two years in Australia while the country’s resources minister Martin Ferguson said the era of high commodity prices was already behind us.
• Gold Fields was ordered to shut down its heap leach operations at its Tarkwa gold mine in Ghana due to a directive from the country’s environmental protection agency requiring the miner to stop discharging water from the heap leach section. Tarkwa is a major gold producer for Gold Fields and is a world class gold mine. In 2011 the mine produced 717,000 ounces of gold of which the heap leach section accounted for just under 200,000 ounces. The Ghana EPA directive requires that all water discharges from the heap leach section be run through a water treatment plant to reduce the dissolved salt levels in the effluent which are a non-toxic pollutant.
• NovaGold, a favorite for those who want to own a long-term out-of-the-money call on higher gold prices, fell 29 percent this week as the prospects for future development were shelved.

Opportunities

• UBS Precious Metals Strategist, Dr. Edel Tully, believes the market is ill-prepared in terms of sentiment and positioning to deal with a surge in gold. She notes the COMEX gold net long position has fallen over 50 percent the past year and there is a large disconnect between paper and the physical market.
• The inverse correlation between the dollar and gold appears to have broken down. In the first five-and-a half-months of the year, gold was inversely correlated with the dollar to a certain degree. Since then, this inverse correlation has virtually disappeared, meaning that dollar strength has not depressed the gold price.
• James Rickards, author of The Currency Wars, recently commented that he estimates that mispricing in the LIBOR market by just 10 basis points on an estimated $500 trillion in the swap market over the last five years could lead to an estimated $2.5 trillion in potential damages which lawyers will be eager to pursue. This could become a negative for financials and the economy. Rickards further noted that the next quantitative easing (QE) to be announced will be open-ended, doing whatever it takes to achieve a defined goal. The problem with QE2 was that it was for a defined dollar amount and time period, so the market quickly discounted its effects.

Threats

• Platinum and palladium are seeing some bearish data points with a selection of European car manufacturers reporting declining vehicle sales in Europe of between 14 to 17 percent with expectations sales will fall further. Car sales in North America have generally been strong, but economic growth has stalled. Europe is a key market with respect to the use of platinum in catalytic converters for diesel engines. In addition to car manufacturers scaling back capacity, Volvo, the world’s second-largest truck manufacturer has reported a second quarter decline in new orders of 19 percent year- over-year, including a 43 percent drop in North America. Platinum group metal refiner Johnson Matthey reported this morning that its refining business was down by about 20 percent during the second quarter.
• The price of grain, America’s biggest crop, has surged more than 50 percent since June 15. It is estimated food inflation may rise to 3 to 4 percent in 2013 after the current drought, as the effects of the country’s worst drought since the 1950s work their way onto supermarket shelves.
• With the U.S. being the biggest corn exporter and as a result of ethanol mandates to supplement gasoline demand utilizing perhaps greater than 40 percent of this year’s crop, we could see food prices surge worldwide, possibly discouraging central banks from easing monetary policy. Last year, 42 percent of China’s soybean imports came from the U.S. In 2012, that number has risen to 58 percent year-to-date. One of the catalysts of the Arab Spring was a rise in food prices.

Tags: Access Economics, Asian Hub, Australian Mineral, Congo Drc, Democratic Republic Of Congo, Drilling Companies, Eagle Mines, Gold Market, Gold Miners, Gold Project, gold stocks, Market Radar, Megaprojects, Mineweb, Mining Development, Nyse Arca, Randgold Resources, Republic Of Congo, Spot Gold, Upside Surprises
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Gold Market Radar (July 23, 2012)

Saturday, July 21st, 2012

Gold Market Radar (July 23, 2012)

For the week, spot gold closed at $1,584.50 down $5.18 per ounce, or 0.33 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.49 percent. The U.S. Trade-Weighted Dollar Index edged 0.13 percent higher for the week.

Strengths

• A trading desk in Toronto pointed out that swap dealers, a category of relatively large traders and big banks, are actually net longs in the gold market. Even though the dollar continues to rally, every time gold seems to dip in price, the market sees renewed support from what may be Chinese buying. With the swap dealers being net long gold, we are seeing a very significant change of ownership in the gold market. While the hot-money crowd has lost interest in gold for the time being, the value-based crowd is apparently accumulating gold at these levels.
• Mag Silver (MAG) reported positive drill results from its 100 percent-owned Cinco de Mayo Ag-Au-Zn-Pb project in Mexico. A long 61m interval of massive sulfide mineralization grading 89 grams per ton Silver, 0.78 grams per ton gold, 0.13 percent Copper, 7.3 percent Zinc and 2.05 percent Lead is a new zone and was documented as one of four separate intersections and suggests MAG may have intersected the “guts” of the Carbonate Replacement Deposit (CRD) system. The gold and copper grades are the highest documented to date at Cinco de Mayo and may also suggest feeder-type, hotter mineralization. Michael Grey, Macquarie gold mining analyst, believes Cinco de Mayo now has the critical mass to be the flagship asset of a separate company and a value driver for MAG shareholders as a potential near-term spin-out company.
• In addition, Fresnillo Plc reported attributable total silver production declined 6.5 percent in the first half of 2012 from 21.46 million ounces during the first half of 2011 to 20.07 million ounces. The declines in quarterly and six-month silver production were attributed to the “expected natural decline in the silver grades at the Fresnillo mine.” This could be a catalyst to push Fresnillo to consolidate this joint venture interest in the higher grade Juanicipio joint venture project with Mag Silver.

Weaknesses

• Anglo American Platinum, the world’s top platinum producer, warned that the first-half earnings will drop by as much as 78 percent, hit by lower sales and prices. South Africa’s platinum sector is battling the impact of weak demand, soaring costs, and a government safety drive that has cut production as operations are suspended for safety violations.
• Mongolia’s biggest political party has formed a coalition with fringe parties which want to limit foreign mining investment in order to gain a parliamentary majority. In the past, they have also demanded a renegotiation of a 2009 agreement which gave Canada’s Ivanhoe Mines, now controlled by mining giant Rio Tinto, 66 percent ownership of the $13 billion in a project. Analysts anticipate substantial pressure for policies to be more populist and resource-nationalist, which in return likely will result in an elevated level of volatility.
• The latest analysis of gold exploration by the well-respected Halifax-based minerals-focused research organization, Metals Economics Group, suggests that despite a huge focus by global miners and explorers on precious metals exploration over the past few years, the rate of new gold resource discovery is substantially lagging behind resource depletion. The group’s latest study, “Strategies for Gold Reserves Replacement: The Costs of Finding and Acquiring Gold,” reports that gold discoveries of at least 2 million ounces over the past 14 years could only replace around 56 percent of the estimated amount of gold mined over the same period, and this is only if these same discoveries prove to be economically minable.

Opportunities

• China is preparing to introduce an interbank gold-trading system, a move that may enable domestic banks to treat the precious metal as a more liquid asset and increase holdings. China has been the largest gold producer since 2007. An interbank gold-trading system would be part of a set of broader reforms that Beijing aims to introduce to make the financial sector more market-driven. Traders note that China is already very important in terms of gold production and consumption and if a new interbank market really does flourish, it could put the Chinese market in the mainstream and become world-class.
• As Julian Phillips of the Gold and Silver Forecaster recently noted on Mineweb, monetary authorities and the banks are ill-prepared to take five more years of what has happened in the last five years. The entire subject of gold being mobilized in the developed world’s monetary system is now firmly center stage as commentary on re-defining gold from a Tier II asset to a Tier I asset has been called for by the Federal Reserve in the U.S. at the same time it is being proposed to the Basel III Committee on monetary reform. If it is so redefined, this will mean that 100 percent of its value can be attributed to a bank’s balance sheet as required assets, up from the current 50 percent. We would consider the Basel Committee’s proposed effective date of January 1 as the most significant step in the re-monetization of gold since it was written out of the global monetary system back in 1971. Redefining gold as a Tier I asset would advance gold’s desirability enormously next year. We expect to see concerted efforts from the banking system to harness this private gold.
• Experiments using gold in the monetary system in Turkey are being watched with fascination by all monetary authorities. As we have discussed in earlier Investor Alerts, Turkey’s commercial banks are targeting customers to open gold deposit accounts. One of our analysts recently returned from a trip to Turkey, where he spoke with representatives of a company that actually had converted 20 percent of its euros into gold so it would have instant liquidity should there be a problem with the euro. In both China and India, major banks offer gold accumulation accounts.

Threats

• David Rosenberg of Gluskin Sheff pointed out that with retail sales down three months in row, a 1-in-50 event, the risk of recession is rising dramatically. David further noted that the next crunch for the consumer, home equity lines of credit, could morph from being a source of liquidity for homeowners into a giant headache that is about to get worse, as almost 60 percent of all home equity lines will start requiring payments of both principal and interest between 2014-2017.
• According to the Energy Intensive User Group, the proposed tariff increase by South Africa’s power utility leaves no space for business to evolve and would make some business completely uncompetitive. The Energy Intensive User Group of Southern Africa has said that the latest media reports surrounding proposed tariff increases by the South African electric public utility Eskom of at least 14.6 percent over each of the next five years would put further jobs at risk in the country. The government’s push to see more downstream beneficiation of minerals becomes even more difficult to achieve in the event of the proposed electricity price hikes. Eskom’s proposed hike could climb to 19 percent if carbon taxes or capital for more power plants was added.
• In 2011, the South African gold fields produced only around 6 million troy ounces of the yellow metal, placing them fourth behind China, Australia, and the U.S. in producer rankings. This is a far cry from the peak reached in 1971, when, according to the South African Chamber of Mines numbers, they produced 79 percent of the gold mined globally. For the mines to remain open, they must mechanize, which will require more energy. While the government may oppose cutting more jobs, you just can’t send workers two-plus miles underground and rely on people and muscle power to achieve the productivity needed to cost-effectively mine the gold.

Tags: Change Of Ownership, Dollar Index, Gold Market, Gold Miners, Gold Mining, gold stocks, Hot Money, Market Radar, Massive Sulfide, Michael Grey, Mining Analyst, Money Crowd, Natural Decline, New Zone, Nyse Arca, Separate Company, Silver Production, Spot Gold, Sulfide Mineralization, Time Gold
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Gold Market Radar (July 16, 2012)

Saturday, July 14th, 2012

Gold Market Radar (July 16, 2012)

For the week, spot gold closed at $1,589.68 up $5.93 per ounce, or 0.37 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 4.72 percent. The U.S. Trade-Weighted Dollar Index drifted 0.10 percent lower for the week.

Strengths

• Corporate insiders buying back their stock is a strong vote of confidence that shares are undervalued.  Recently, Serafino Iacono, Gran Colombia’s co-chairman has been on a stock buy back spree.  In April, Iacono owned around five million Gran Colombia shares.  Now, after three months of systematic share buying, he holds over 12 million Gran Colombia shares.  The buying comes as Gran Colombia’s share price trades, like so many other gold stocks, near 52-week lows.  A number of company executives are lamenting that their shares are undervalued but few are putting their money where their mouth is.
• Despite problems seen by some commentators regarding the Argentina government’s attitude toward mining, Latin America-focused junior gold miner, Minera IRL, indicated that it is set on proceeding with its Don Nicolas project in Argentina.  The Don Nicolas project is located in Patagonia’s Deseado Massif in mining-friendly Santa Cruz province where gold and silver mining has been under way for some time.  Patagonia is sparsely populated with little agricultural significance and mining is proving to be a great boost to its economy.
• Dundee Precious Metals bounced back this week with the Namibian government allowing the company to raise the flow rate at the Tsumeb smelter to 75 percent of operating capacity versus 50 percent.  Dundee was able to demonstrate that fugitive emissions were now largely contained with its ongoing program to upgrade the environmental performance of the plant since it purchased the smelter.

Weaknesses

• Anti-foreigner campaigners have emerged as the big winners in Mongolia’s June election.  Increasing power is bad news for the international mining corporations which have been trying for years to get potentially huge projects going there.  “The fact that several resource nationalists won increases the uncertainty for investors,” said the Mongolia manager for Canada’s Prophecy Coal.  Ivanhoe Mines fell 11 percent over the course of the week on the news.  More than a quarter of the 76-seat parliament is now held by politicians who advocate local control of mines
• “Free Cash Blown was the pre-release strikethrough title of one analyst’s second quarter earnings preview for the gold stocks. The title was ultimately edited to “Low” instead of “Blown” before press time this week.  With the gold price off nearly 5 percent in the second quarter and other by-product metals such as silver, copper, lead and zinc all down in price it is not a surprise that earnings will likely decline for reporting purposes.
• Since the price of gold has experienced its first notable quarterly decrease since the fourth quarter 2008, despite near-record quarterly average gold prices, analyst Josh Wolfson anticipated no companies under his coverage to report positive free cash flow, as rising capital spending budgets have outpaced operating cash flow leverage.

Opportunities

• According to Benjamin Cox, Managing Director of Oreninc, he anticipates there is going to be a feeding frenzy in the junior mining space this fall as the major gold companies look to replenish ounces at some of the cheapest levels seen for a very long time.  Cox points out that you can’t sink drill holes for less than what these juniors are trading at.  “I see majors standing there and saying wow, we can replenish out ounces and tonnes in the ground for the cheapest amount we’ve ever been able to do it. Even if they offer a 50 percent premium to current share prices it’s still a 70 percent discount to historical share prices.”
• The Gold Report interviewed George Topping of Stifel Nicolaus on his view that gold companies need to look toward aiming for a 5 percent dividend yield to attract fund flows back into the sector.  Large international mining companies have dividends that are much higher than the gold companies but as George points out the gold companies have been trying to grow gold production at any price.  We call it “GAAP,” growth at any price.  Circumstances have changed.  Growth is now unaffordable due to inflation.  Capital costs have doubled in the last four years.  It’s time for the gold mining companies to wake up, stop building these new $6 billion mining projects and pay more dividends to shareholders.
• Gold will climb to a record by year end as the global economy slows from the weight of too much debt, says Eric Sprott, the founder and chairman of Canadian fund manager Sprott Inc.  “I just can’t imagine the demand for gold is going down.  I don’t personally see a solution to the problem we are in, the financial leveraging issue that we all have where everybody wants to shed debt and there’s no buyers.”  He expects bullion will rise as investors seek the safest assets while governments spend to stimulate their economies, increasing chances that inflation will accelerate.

Threats

• The Reserve Bank of India is looking to mobilize the country’s idle gold deposits. The bank is mulling ways other than direct curbs on imports of gold to reduce the current account deficit. The Deputy Governor of the Reserve Bank of India (RBI) said the bank is considering financial instruments that mimic the returns of gold. The idea is to put the idle gold to productive use. At this point there is still no clarity on how such a plan would be constructed.
• The recent High-Tech Strategist report by Fred Hickey noted how the low interest rate policy of the Fed is crushing savers and there is no end in sight.  While negative interest rates are good for gold due to the fear trade, it doesn’t help much in the love trade arena where investors lack confidence in the politicians to implement sound policies.
• Hickey further points out that next year the top dividend tax rate will be 43.4 percent at the federal level.  One has to ask, why would anyone continue to invest in a high-risk environment?  If you find a way to win, you can give nearly half of your gains to the government, but if you lose–well you can write off $3,000 per year against ordinary income.  It’s no wonder trading volumes are collapsing.

Tags: 52 Week Lows, agricultural, Agricultural Significance, Argentina Government, Corporate Insiders, Dundee Precious Metals, Fugitive Emissions, Gold Market, Gold Miner, Gold Miners, gold stocks, Gran Colombia, Junior Gold, Market Radar, Namibian Government, Nicolas Project, Nyse Arca, Santa Cruz Province, Spot Gold, Sprott, Stock Buy Back, Vote Of Confidence
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Gold Market Radar (July 9, 2012)

Sunday, July 8th, 2012

Gold Market Radar (July 9, 2012)

For the week, spot gold closed at $1,583.75 down $13.65 per ounce, or 0.85 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.70 percent. The U.S. Trade-Weighted Dollar Index surged 2.03 percent for the week.

Strengths

• Turkish banks are shoring up their reserve base by pouring their technical expertise and marketing resources into offering their customers gold deposit accounts. For cultural reasons gold is big business in Turkey which has had experience with bouts of high inflation over the past century.  Customers can deposit their gold in the bank and can make withdrawals from their accounts in gold bars or the lira currency.  In addition, gold accumulation accounts can be set up where the customer makes monthly purchases of gold. In September 2011, the central bank increased the ration of lira reserves that could be held in the form of gold from 0 to 10 percent, raising it further to 20 percent in March 2012 and 25 percent last month.  This had the effect of significantly increasing the banks’ desire for taking in gold deposits.
• China’s Ministry of Industry and Information Technology released data that showed the country’s gold output for the year so far, rose 6.59 percent year-over-year to 140.7 tons.  However this suggests that the world’s largest producer’s pace of increase in output over the last five months could be declining, although it is still too early to call a trend.  Monthly production data for April and May showed a slowdown in production from the first 3 months of the year.
• One of Greece’s largest construction companies, Ellaktor SA, noted after its annual meeting that with the Halkidiki Mines obtaining a gold mining license, this was very positive and will likely result in the implementation of a significant investment plan in the coming years.  Ellaktor anticipates the friendly takeover of European Goldfields by Eldorado Gold Corporation should result in some significant new business for the company and speaks well of the permitting process going forward for Eldorado.

Weaknesses

• ISI’s Weekly Economic Report listed 197 simulative policy initiatives announced around the world in the past 10 months which have yet to create a self-sustaining recovery.  David Rosenberg of Gluskin Sheff noted recently that profits are contracting for the first time in three years and corporate guidance is decisively negative.  The ratio of negative to positive pre-announcements has actually risen to 3.5x–the highest since the third quarter of 2001.
• Harmony Gold suffered a minor setback when a judge in South Africa ruled that even though Harmony had sold one of its gold mining operations to a company that later went bankrupt it was still responsible for any environmental liabilities even though those liabilities had been transferred to the new owner.
• Pan American Silver’s Navidad project in Argentina was essentially rendered uneconomic under a newly proposed law in the province of Chubut in Argentina.  Much like the Ecuadorian plan laid out by its government for the development of the Fruta del Norta deposit, the government wants what is essentially greater than 50 percent of the economic profits.

Opportunities

• Stifel Nicolous Canada, in a recent gold industry update, noted that China gold imports from Hong Kong, a proxy for gold buying activity in the country, decreased to 2.4 million ounces in May (from 3.3 million ounces in April).  Although May imports decreased significantly on a month-over-month basis, they are still up seven-fold year-over-year, and we expect them to increase as we enter into the seasonally strong August to December period for gold prices (Indian weddings, Christmas and Chinese New Year). We believe gold imports will continue to surge based on our thesis of increasing appetite for gold as newly wealthy Chinese citizens seek to diversify domestic economic and political risk through hard assets. We would not be surprised by more gold purchases by the Chinese government for diversification from the U.S. dollar and now in particular, the Euro.  The environment, (negative real interest rates worldwide including planned, sustained low-interest rates in the U.S. through 2014, ballooning sovereign debts, and Europe debt problems) remains positive for gold prices.  We continue to believe that gold prices could increase to $2,000 per ounce by 2013.
• Martin Murenbeeld pointed out in his weekly piece that gold continued to make headway as a financial asset: It appears that the Federal Deposit Insurance Corporation (FDIC) may have taken up the discussion along with the Bank for International Settlements (BIS) to reclassify gold as a risk-free asset for bank capital adequacy ratios.  This would essentially zero risk-weight gold along with cash and direct claims on the U.S. government.  Slowly but surely gold is reentering the financial arena in an official capacity.
• In an interesting slant, Kazakhstan is planning to add a third gold refinery by year-end 2013 so it will have enough capacity to ensure the Central Asian country can refine all the gold the country produces for supply to the central bank and will not need to ship some of its gold out of the country for refining by Switzerland.  Not only does Kazakhstan not want to place its gold at risk by being outside of it control, the country plans to raise its share of gold in its gold and foreign currency reserves to 20 percent from 14-15 percent.  Officials further elaborated they were cutting their exposure to the euro in favor of gold.

Threats

• After substantial pressure from Congress, the SEC said it would meet on August 22 to publically vote on two sets of rules, which are arguably the most controversial under the 2010 Dodd-Frank Wall Street reform law. The conflict minerals rule would require companies to disclose whether they use tantalum, tin, gold or tungsten from the Democratic Republic of the Congo.  The other rule would require oil, gas and mining companies to disclose payments they make to the governments.  The delays have been fueled by a bitter dispute between human rights groups who say the rules will help reduce corruption and companies who say they will be too costly and difficult to implement.  As proposed, companies would need to identify if any conflict minerals are used in their products and trace back the origins of said minerals through their supply chain, which would be very costly to implement.
• The president of Nicaragua will propose changes to the country’s mining laws as part of a package of constitutional reforms to be presented to Congress for debate on July 16. The proposed mining law change says “the state reserves the right to acquire up to 40 percent of all extraction businesses.  The state will be able to become a shareholder in all companies that extract natural resources.” Guatemala’s mining chamber is pushing for the government to scrap the plan, claiming it will hurt mining development in the Central American country.  But a top presidential adviser who helped draft the reform, said the government was moving forward with the plan, which had so far received more support than criticism.
• Market Cutifani, CEO of AngloGold Ashanti, commented that Australia’s tax policies are more of a worry to his company than calls within South Africa’s ruling party to nationalize mines and impose more duties. “It’s clear at the senior-levels of the ANC there is no appetite for nationalization.” Essentially, the South Africans understand there will be no mines if the economics don’t work.  Cutifani pointed out that recent Australian tax policies have been draconian toward the mining industry.  As of July 1, iron ore and coal companies in Australia making more than AUD$75 million in annual profits must pay an additional 30 percent “Minerals Resource Rent Tax” An AUD$23 per ton carbon tax on emissions also took effect the same day and applies to all businesses.  Even a single six pack of beer in the grocery store will run you upwards of AUD$25.

Tags: Deposit Accounts, Dollar Index, European Goldfields, Friendly Takeover, Gold Bars, Gold Corporation, Gold Deposit, Gold Deposits, Gold Market, Gold Miners, Gold Mining, Gold Output, gold stocks, Investment Plan, Lira Currency, Market Radar, Nyse Arca, Spot Gold, Turkish Banks, Year One
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