Gold Market Radar (December 28, 2011)

Gold Market Radar (December 28, 2011)

For the week, spot gold closed at $1,606.35 up $7.40 per ounce, or 0.5 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, rose 0.5 percent. The U.S. Trade-Weighted Dollar Index fell 0.3 percent for the week.

Strengths

• An Organization of American States Human Rights Commission withdrew its demand for the Guatemalan government to close Goldcorp’s Marlin Mine. This demand was made back in June 2010. Originally, it was claimed that a study by the Physicians for Human Rights had found samples collected from locals living around the mine having “higher levels of potentially toxic heavy metals in their urine and blood than a sample of residents who lives farther from the mine.” Recently, the Presidential Commission on Human Rights, which was on behalf of the Guatemalan government, determined that “no proof exists that there is any situation presenting serious or imminent harm to persons in the area as a result of the operations at the Marline mine.”
• Torex Gold signed critical land use agreements governing surface rights over its Morelos project in Mexico. In order for the three-million ounce deposit project to move to production, Torex will next have to relocate two villages and sign long-term land leases. The company stated Friday that it has made significant progress with this, and that it has signed long-term leases with the Rio Balsas Ejido, a group of communal land owners and individuals accounting for 1,083 hectares of land. CEO Fred Stanford had said this amounted to “63% of the land required to put the Morelos gold deposits into commercial production.”
• It was announced late Sunday that the rumor of Eldorado Gold acquiring European Goldfields was true. Eldorado Gold will acquire European Goldfields for a friendly C$2.5 billion cash-and-share plan, offering 0.85 Eldorado shares and C$0.0001 in cash for each European Goldfields share. Combined, annual gold production will be increased to 650,000 ounces per year, with the expectation of growing to 1.5 million ounces by 2015 through mine expansions and projects in the pipeline. The shares for European Goldfields were initially down close to 14 percent on the news but finished the week only off by around 4 percent.

Weaknesses

• After the Peruvian prime minister, Oscar Valdes, excluded environmental activists from mediation talks, a new round of talks hoping to end the dispute over Newmont Mining’s Conga mine in Peru appeared to break down. It was speculated that Valdes’ promotion to PM a week ago would lead to less willingness to use dialogue to solve hundreds of environmental disputes nationwide, and a crack down on protestors. Gregorio Santos, governor of the region of Cajamarca, had said referring to the breakdown in talks that, “what happened is that Valdes wouldn't tolerate more participation. He doesn't want to listen to anybody.” After the meeting Valdes said, “What happened is unfortunate, we've asked for more time to talk.”
• Always pay your taxes. Coeur d’Alene learned that lesson the hard way last week when Rye Patch Gold capitalized on non-payment and assumed ownership of Coeur d’Alene claims. Sixth Judicial District Court Judge Michael Montero issued a preliminary restraining order which allows Rye Patch Gold to continue exploring some claims around the Coeur Rochester silver mine in Nevada, but prohibited Rye Patch Gold to access a number of claims next or near to the mine. The judge did not invalidate Rye Patch’s newly held claims and the stock jumped 18 percent for the day.
• David Wessel of the Wall Street Journal recently penned an article where he noted the supply of super safe assets, bonds for which there is almost no risk of default, has fallen to $12 trillion from about $22 trillion in the past four years. Emerging markets seeking foreign exchange reserves of “safe assets” have risen to nearly $7 trillion from $4 trillion in the same period. Surprisingly, it is cheaper to buy default protection in the swap market for companies like Exxon or Wal-Mart than it is for U.S. government debt or Swiss debt, respectively. While negative for governments deeply in debt, this has been a positive for gold, as it has been a relatively stable monetary asset for 5,000 years, and has been a viable monetary asset in net accumulation for a number of emerging market banks.

Opportunities

• Mineweb published a story last weekend highlighting Jeff Nichols’ recent address to the China Gold and Precious Metals Summit in Shanghai, with twelve bullish factors driving gold to $2,000 and higher, despite the recent setback. A couple of the points we would highlight from Jeff’s comments are the legitimization of gold as an investment class and rising investor participation. As gold’s investment returns are not highly correlated with the market it helps create a well-diversified portfolio which has attracted the entry of new, large-scale, professional investors – including pensions, endowments, insurance companies, and sovereign-wealth funds. The "stickiness" of much of the recent private sector and central bank gold demand is shrinking the available "free float" in the world gold market which means that less metal will be available to gold-hungry buyers, except at increasingly higher prices. Indeed, many of today's new investors have no intention of ever selling, even at much higher prices. And lastly, Jeff notes the fact that world gold-mine production, although growing, will not keep pace with the expected growth in global gold demand. Even a rash of new mine discoveries would take five to 10 years, or more, to contribute significantly to supply.
• The Gold Report interviewed Michael Gray of Macquarie this week and touched upon the junior precious metals explorers’ underperformance against the gold price this year. Analysts at Macquarie believe that there is “a strong investor appetite for high-grade, high-margin situations with relatively near-term production associated with low capital costs and short permitting timelines.” Furthermore, the juniors’ underperformance leaves room for a “strong mergers and acquisitions (M&A) thesis” with valuations at levels similar to 2008. Companies that Mr. Gray outlined as being consistent with this thesis include Extorre Gold Mines, Mirasol Resources, and Eastmain Resources.
• David Christensen, ASA CEO, spoke this week about the recent rise in gold mining dividend payments, saying, "It is funny to hear you talk about the rising dividends as a new trend...There used to be a rule of thumb that we wouldn't look at a mining company or gold mining precious metals producer unless the dividend yield was in excess of 10%." Recently, the number of mining companies paying a dividend and/or increasing the payout has been increasing significantly. This trend, in fact, brings the gold miners to a full cycle, where dividends were popular around 20 years ago. Presently, with many gold producers’ balance sheets having significant free cash flow, dividends are making a return.

Threats

• President Hugo Chavez said that Venezuela would be willing to transfer 10 percent of the country’s gold reserves, representing $1.8 billion, to Banco del Sur, a regional development bank the nation supports. There are concerns over whether gold could be used as a source of funding for social programs much like oil has been used in that country.
• The European Central Bank provided €489 billion in below-market interest rate loans to more than 500 banks across the eurozone this week. The intent is that the banks would take this cheap money and buy the debt of their respective governments. Ironically, the banks have been in the process of selling their sovereign debt exposure because the threat of markdowns on such holdings meant they would need to recapitalize with greater equity issuance. So, the Europeans have kicked the can down the road again, but they are effectively printing money and engaging in a backdoor quantitative easing.
• Recession risk and the slowing Chinese economy are a threat to gold. GDP contractions along with 20 percent plus unemployment in some regions typically have been a headwind to gold prices. The Chinese equity market is currently testing the March 2009 lows and this has likely tested Chinese investors’ confidence, too, although imports of gold into the country have accelerated this year.