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 Miners are Finally Starting to Outperform Bullion

Tuesday, August 14th, 2012

by Michael Kahn, Barron’s

Although it has been quiet on the gold front in recent months, gold-mining stocks are finally making some technical noise. They are not yet fully in bullish mode, but several changes on the charts bode well for miners and, by extension, for the metal too.

The first chart of consequence is the performance comparison between gold shares and gold itself. By plotting a ratio of the Market Vectors Gold Miners exchange-traded fund (ticker: GDX) to the SPDR Gold Trust ETF (GLD), we can easily see changes in their relationship (see Chart 1).

The chart headed south for most of this …

Read the complete article below:

Gold Miners Starting to Pan Out

Tags: Barron, Bullion, Consequence, ETF, Exchange Traded Fund, Gold Exchange, Gold Front, Gold Fund, Gold Miners, Gold Mining Stocks, Gold Pan, Gold Shares, gold stocks, Market Vectors Gold Miners, Michael Kahn, Performance Comparison, Relationship, Spdr, Technical Noise, Ticker, Vectors Gold Miners
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Which Way Will the Pendulum Swing for Gold?

Saturday, August 11th, 2012

Which Way Will the Pendulum Swing for Gold?

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

One of the most fascinating aspects when watching a sporting event like the Olympics is the historical statistics highlighting the tremendous advances in athleticism over the years. In the spirit of the events this summer, BTN Research compared gold’s advancement from the beginning of the games in Beijing to the London Olympics.

On the day of China’s auspicious opening ceremonies on August 8, 2008, gold was $857.80 an ounce. By the time the world watched the opening ceremonies of the 2012 London Summer Olympic Games, the precious metal had climbed to $1,617.90 an ounce. This represents a remarkable increase of 89 percent in four years.

Athletes are often asked if they can keep improving their outstanding performance; I’m asked if gold can continue climbing. As I like to remind investors, gold isn’t always on an upward path. When looking at the average monthly returns over the past decade, you can see that short-term setbacks are normal throughout the year. The yellow metal has historically declined in value in March and June; gold stocks see much greater fluctuations from month-to-month.

So while gold has its monthly ups and downs, you can see that, on a historical basis, we have arrived at gold’s peak performance period of the year. Based on 10 years of data, gold bullion has historically increased 2 percent in August and 4 percent in September.

Gold stocks, as measured by the NYSE Arca Gold BUGS Index (HUI), have historically performed even better in these two months. Over the past 10 years, gold companies have climbed 8 percent and almost 3 percent in August and September, respectively.

Since the beginning of August, gold and gold stocks are already following their historical pattern, as we’ve seen just a hint of an increase in the price of gold, but a significant bounce in gold companies.

Spot gold has only climbed 0.4 percent, compared to the HUI, which has increased about 5 percent since August 1. This boost in gold stocks helps to close the gap between gold companies and their underlying commodity, as I discussed last week. I indicated that the disparities meant that the cheapest resources are not found in the ground—they’re listed.

Since then, it was announced that Endeavor Mining would purchase Canada’s Avion Gold Corporation in an effort to consolidate the West African gold space. This acquisition represented a 56.4 percent premium to the trading day prior to the announcement and illustrates how extremely undervalued gold companies have been.

“Beaten-down gold stocks are an incredible fundamental bargain,” says Adam Hamilton from Zeal Intelligence. His research indicates that gold companies are “super-cheap” relative to not only the price of gold, but also on a price-to-earnings basis. When he weighted the price-to-earnings ratios of the stocks in the HUI by market capitalization, he found that gold stocks are at the lowest levels than they have been during gold’s entire bull market. Gold companies are also cheaper than the overall stock market, as “a dollar of gold-stock profits costs investors $12, but the same dollar is going for $18 in the general markets,” according to Zeal’s research.

Hamilton says, “Like the rest of the markets, sentiment flows and ebbs in the gold stocks. Sometimes investors love them and bid them up to dizzying heights as greed reigns. But then the great sentiment pendulum starts swinging towards the opposite extreme of fear. And gold stocks are crushed to ridiculous unsustainable lows like we saw last month. Realize neither excessive greed nor excessive fear can persist for long.”

There is a caveat for gold stock investors in the short-term, though. As Investor Alert readers know, I frequently look at presidential cycle trends to determine where stocks may be heading. From 1984 through 2008, the performance of the Philadelphia Stock Exchange Gold and Silver Index (XAU) has historically been weak during the year of a presidential election. The silver lining is that the year following the election, the XAU has historically bounced back.

So which way will the pendulum swing this fall for gold and gold stocks? The market may wait to see the policy actions by the Federal Reserve and the European Central Bank. Credit Suisse thinks it will likely “be critical in determining the path of the U.S. dollar and equities, and by association, gold.”

If the market sees progress on structural and fiscal reforms from Europe and additional easing from the Fed, these actions would have the “potential to be powerfully bullish for equities” and might “drive renewed investor enthusiasm for gold that could see the metal trade up to and beyond the $1,700 mark,” says Credit Suisse.

Copyright © U.S. Global Investors

Tags: August Gold, Chief Investment Officer, Frank Holmes, Gold Bugs, Gold Bullion, Gold Companies, gold stocks, London Olympics, London Summer, Nyse Arca, Olympic Games, Pendulum Swing, Performance Period, Price Of Gold, Remarkable Increase, Spot Gold, Summer Olympic Games, U S Global Investors, Ups And Downs, Upward Path
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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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Stocks Have Their Biggest Week of the Year on Lowest Volume

Thursday, July 5th, 2012

The S&P 500 gained over 3.5% this week (with a dip-and-rip today on dismal volume). This is the best week of the year amid the lowest volume of the year (ex-holiday weeks). Gold, Stocks, Treasury yields, and the USD all recoupled from last Friday’s decoupling and limped higher, ending at the top of the day’s range today. Financials and Tech outperformed – up over 1.1% – with the majors best as financials won on the week +4.8%. Treasuries close to close were dull but intraday saw rather notable vol as 30Y yields dropped over 10bps before round-tripping back to its high yields of the day. All-in-all, broad risk assets did leak higher today but nothing like as exuberantly as stocks which was somewhat surprising into a weekend likely full of equity dilution for Spanish banks (and more burden for Spain) – or none at all. The USD rallied into the European close and sold off after for the fifth day in a row. HYG outran stocks on the day and maintained the bid (ES closed at overnight highs) but IG and HY credit lagged on the day – though are al better on the week. Cross asset-class correlations dropped notably into the close, as implied correlation dropped and VIX was very stable given the rally into the close, holding above 21% – even as S&P 500 e-mini futures ended the day more than 2 sigma above VWAP (as we suspect futures roll effects kept some out into the weekend). Lastly, this push higher today in stocks saw a major drop in average trade size – certainly not offering the kind of follow through to yesterday’s (or the week’s) gains that one would expect on a new bull leg.

Today saw ES retrace perfectly 38.2% of its last few day’s rally only to bounce and push back to close at those highs…

S&P 500 rose over 3.5% on the week, best week in six months, as volume lagged dramatically…

led by financials best week in 3 months…

But Stocks, Bonds, USD, and Gold all resynced from last week’s decoupling and limped along together…

As the S&P 500 e-mini futures closed at overnight highs and rather surprisingly around 2 sigma (light blue) above VWAP (red) with a late-day shift in peak volume (the dark blue line) suggesting we had auctioned up to retest those levels as we note some bigger blocks going through at the close…

For the fifth day in a row, the dollar strengthened into the European close and then faded after…

Charts: Bloomberg

Tags: Amp, asset class, Correlation, Correlations, Decoupling, Dilution, Fifth Day, Futures, gold stocks, Holiday Weeks, Hy, Last Friday, Majors, Rally, Sigma, Spanish Banks, Stocks Bonds, Treasuries, Treasury Yields, Vwap
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