Gold Mar­ket Radar (Decem­ber 4, 2011)

For the week, spot gold closed at $1,746.75 up $63.22 per ounce, or 3.76 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, gained 6.51 per­cent. The U.S. Trade-Weighted Dol­lar Index fell 1.33 per­cent for the week.

Strengths

• Gold and gold stocks got a big lift this week as the Fed­eral Reserve announced a coör­di­nated pol­icy change with five other cen­tral banks to lower the bor­row­ing cost between the cen­tral banks and estab­lish addi­tional bilat­eral swap lines between the banks so that liq­uid­ity can be pro­vided in each juris­dic­tion, in any of the cur­ren­cies, if necessary.
• This step is seen as a pre­lude to hav­ing the sup­port sys­tems in place for Euro­pean banks to imple­ment some deci­sive actions in the com­ing weeks with regard to their debt crises. UBS spec­u­lated that mar­kets may con­clude Eurobonds may be the likely endgame and this would mean print­ing lots of money to buy bonds. Gold would be the main ben­e­fi­ciary of such a pol­icy action.
• Mean­while, gold pur­chases in China jumped six­fold year-over-year, helped by num­bers reach­ing a high for the month of Sep­tem­ber at 56.9 tonnes. Just in the most recent quar­ter, China imported 140 tonnes in sharp con­trast to the 120 tonnes in total taken in dur­ing 2010. The Chi­nese gov­ern­ment has been actively pro­mot­ing gold and sil­ver pur­chases to its cit­i­zens via state-owned media outlets.

Weak­nesses

• New­mont Min­ing halted its $4.8 bil­lion Conga mine work this week cit­ing safety rea­sons for employ­ees and the local com­mu­nity. At least 30 peo­ple were injured when police fired rub­ber bul­lets, tear gas and at least two live rounds at pro­tes­tors opposed to the gold project, when demon­stra­tors started van­dal­iz­ing the U.S. mine property.
• The Peru­vian gov­ern­ment has asked New­mont to tem­porar­ily halt its work to calm the vio­lent protests and to restart talks with the local com­mu­nity. In a week when gold was quite strong, the news did not impact the stock too much as New­mont is one of the few U.S. based gold min­ing com­pa­nies that has a cap­tive audi­ence of buy­ers based on restric­tive invest­ment pol­icy state­ments that limit cer­tain insti­tu­tional investors to just this name.
• Rand­gold Resources trimmed its out­put guid­ance for 2011 from 740,000 to 760,000 ounces of gold to 690,000 and 700,000 due to set­backs at their Ton­gon mine in Ivory Coast. Wet weather and min­ing through tran­si­tional ore made for dif­fi­cult min­ing con­di­tions. Addi­tion­ally, a work stop­page, a dif­fi­cult changeover from diesel-generated power to the national grid, and a mechan­i­cal fail­ure of the mill also con­tributed to the revised down out­put tar­gets. The stock was down 6.2 per­cent on this news but rebounded 7.2 per­cent the fol­low­ing day. Investors snapped up the shares of Rand­gold on the pull­back as it still has one of the strongest pro­duc­tion growth pro­files in the indus­try and aver­age ore grades three times the aver­age of its peers.

Oppor­tu­ni­ties

• SoGen released its much antic­i­pated Mult Asset Port­fo­lio Scenario/Strategy guide and its expects the Fed to announce in Jan­u­ary 2012 it will keep inter­est rates at zero until employ­ment falls below 7.5 per­cent or infla­tion moves above 3 per­cent on a sus­tained basis. This will be fol­lowed in March 2012 by another round of quan­ti­ta­tive eas­ing in the $600 bil­lion range.
• SoGen’s ulti­mate con­clu­sion is “Buy gold ahead of QE3 as money cre­ation has a strong impact on prices.” Esti­mates are that gold could rise to $1,900 to close the gap with the mon­e­tary base due to QE1 and QE2. How­ever, a gold price of $8,500 would be needed to close the gap with the expan­sion of the mon­e­tary base since 1920, as it did in the early 1980s.
• UBS noted that there is a large amount of poten­tial energy in the gold mar­ket in response to the announce­ment of coör­di­nated action by cen­tral banks. Until now, despite ris­ing fears of the euro­zone split­ting and a con­ta­gion as a result, gold prices have been quite unre­spon­sive. UBS has spec­u­lated that, "delever­ag­ing and fund­ing pres­sures are keep­ing investors fear­ful of a replay of 2008, when gold fell 31% between July and Octo­ber, but was one of the first assets to rebound." Look­ing ahead to 2012, how­ever, they believe that gold could be in for some "poten­tially explo­sive moves".

Threats

• At the North­west Min­ing Asso­ci­a­tion recently this week, Leigh Free­man, gen­eral man­ager and prin­ci­pal of Down­ing Teal, high­lighted that, “we have a seri­ous prob­lem that we can put off no more.” Leigh reported that at least 50 per­cent of today's min­ing pro­fes­sion­als in the U.S., Canada and Aus­tralia will retire over the next seven years, with not enough grad­u­at­ing to fill the vacant posi­tions. Addi­tion­ally, those who do grad­u­ate lack the lead­er­ship, inno­va­tion and crit­i­cal think­ing of the expe­ri­enced baby boomers, which will also hurt mining's abil­ity to meet global com­modi­ties needs.
• Richard Fisher, Pres­i­dent of the Fed­eral Reserve Bank of Dal­las noted that U.S. risks “social unrest” if we don’t bring the fed­eral debt under con­trol. He pointed out our debt bur­den is larger than that of Europe and appar­ently we are still mov­ing in the wrong direction.
• In the far north of Canada, Inuit in Nuan­vut passed a res­o­lu­tion that will increase native roy­al­ties to 12 per­cent on April 1, 1013. They expect to take in nearly a half a bil­lion dol­lars from the roy­alty in the first six years.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

Comments

Comments are closed.