Gold Mar­ket Radar (Jan­u­ary 16, 2012)

Strengths

• Gold, which had been trad­ing below the 200-day mov­ing aver­age, crossed above on Tues­day with momen­tum play­ers join­ing the mar­kets. For the week, gold closed just above the 200-day mov­ing aver­age at $1,639.30 an ounce. Pal­la­dium also had a strong move, up almost 3 per­cent for the week on warn­ings of power sup­ply cur­tail­ments in South Africa which could effect mine production.
• China’s Min­istry of Indus­try and Infor­ma­tion Tech­nol­ogy reports that China pro­duced 32.61 tons of gold in Novem­ber, a 2.7 per­cent increase from the pre­vi­ous month. Total out­put for the first 11 months of 2011 rose 4.85 per­cent. More impor­tantly, the lat­est trade data shows China imported 102 tons of gold from Hong Kong in Novem­ber, the most ever. In addi­tion, gold coin sales in the U.S. surged to 85,500 ounces sold dur­ing the first 12 days of Jan­u­ary, accord­ing to the U.S. Mint. At this pace of sales, Jan­u­ary could be the high­est level of gold coin pur­chases since Decem­ber 2009.
• In the midst of earn­ings sea­son, a num­ber of com­pa­nies reported very pos­i­tive results. Yamana Gold fore­casted a 13 per­cent increase in gold equiv­a­lent pro­duc­tion for 2012 after pro­duc­ing a total of 1.1 mil­lion ounces in 2011. Gold­corp also fore­casted a 70 per­cent increase to 4.2 mil­lion ounces of gold pro­duc­tion in five years and 2012 gold pro­duc­tion guid­ance of 2.6 mil­lions ounces. This comes after the com­pany met 2011 gold pro­duc­tion guid­ance at 2.5 mil­lion ounces. Freeport McMoRan reported that work­ers who returned to their Gras­berg mine in Indone­sia con­tin­ued to ramp up pro­duc­tion. The strike had gone on for three months, tight­en­ing cop­per pro­duc­tion. The stock was up nearly 8 per­cent for the week on this pos­i­tive news.

Weak­nesses

• With earn­ings being reported for a num­ber of com­pa­nies, investors took short-term prof­its where they could on Fri­day. This led gold and the NYSE Arca Gold Min­ers Index (GDM) down 0.68 and almost 1.3 per­cent, respec­tively, for the day. Although the gold rally was dented, it was not reversed. Senior gold equi­ties were hit the hard­est on Fri­day, down 1.14 per­cent for the day, while juniors were only down 0.21 per­cent. On a country-specific basis, South African gold stocks were hit the most as cur­rency and elec­tric­ity restric­tions weighed on their per­for­mance. Junior gold explo­ration and devel­op­ment stocks out­per­formed senior gold equi­ties on the whole for the week, with added strength seen in the senior sil­ver names.
• Momen­tum in the gold mar­ket stalled on Fri­day with a bit of profit tak­ing from short-term play­ers. The Shang­hai Gold Exchange also announced it would tem­porar­ily raise mar­gin require­ments on gold and sil­ver ahead of the week-long Lunar New Year holiday.
• Hecla Mining's Lucky Fri­day min­ing project has turned out to be not-so-lucky. The com­pany announced this week that it would be shut­ting down a sil­ver shaft on the project due to main­te­nance and a safety review fol­low­ing a rock burst in late Decem­ber. This mine accounts for 25 per­cent of its sil­ver pro­duc­tion. Accord­ingly, the com­pany reduced its 2012 sil­ver guid­ance by 2.5 mil­lion ounces to 7 mil­lion ounces. Hecla was down over 20 per­cent on the news.

Oppor­tu­ni­ties

• Asian demand for gold seems to be pick­ing up again. While the Indian rupee has slightly strength­ened, prices have remained sta­ble, lay­ing the ground­work for improved Indian demand for the metal. With the Chi­nese New Year hol­i­day just around the cor­ner on Jan­u­ary 23, news reports show gold imports through Hong Kong are at record lev­els and the Chi­nese gov­ern­ment is suc­cess­fully man­ag­ing its econ­omy by tam­ing infla­tion. This is reas­sur­ance that gold demand will con­tinue to rise from the country.
• While cen­tral banks have been net pur­chasers of gold since 2009, pen­sion and insur­ance funds only hold 0.3 per­cent of their assets in gold and min­ing shares. A com­men­tary on Mineweb.com made the point that with con­tin­u­ing losses and grow­ing pen­sion deficits, these funds may be forced to hold gold because it is the only asset class neg­a­tively cor­re­lated to finan­cial assets such as stocks and bonds. With over $200 tril­lion of global finan­cial assets, this would rep­re­sent a mas­sive shift from the $2 tril­lion in gold bul­lion pri­vately held today.
• Argentina is expect­ing the min­ing sec­tor to con­tinue to expand over the next six months as two Cana­dian min­ers, Pan Amer­i­can Sil­ver and Gold­corp, plan to start con­struc­tion on size­able projects. Although it still lags behind regional heavy­weights such as Chile and Peru, Argentina’s min­ing indus­try has been expe­ri­enc­ing rapid growth since 2003.

Threats

• Research ana­lysts expect gold min­ing to be socially chal­lenged in 2012 as indus­try par­tic­i­pants will need to demon­strate that the exist­ing for­mal min­ing mod­els in the host coun­try, rather than the informal/illegal type of min­ing, are work­ing and con­tribut­ing to the coun­try. A sig­nif­i­cant short­age of skilled labor and a neces­sity for com­pa­nies to show that their activ­i­ties are socially respon­si­ble and pos­i­tively con­tribut­ing to the local com­mu­ni­ties will also prevail.
• Mem­bers of the Lon­don Metal Exchange (LME) are push­ing the LME to retract a new user trad­ing fee that would boost the exchange’s rev­enues and encour­age poten­tial bid­ders. Bro­kers are con­cerned that it would hurt their way of doing busi­ness. Tra­di­tion­ally, the LME has kept trad­ing fees low. Mineweb.com reported that indus­try sources say mem­bers were not con­sulted on the levy and some are ral­ly­ing their peers to try and per­suade the LME board to head off the move sched­uled to take effect in March.
• Poland’s con­tro­ver­sial min­ing tax has been approved by the com­mit­tee that pre­pares gov­ern­ment leg­is­la­tion and now only requires final clear­ance from the gov­ern­ment and par­lia­ment. This new min­ing tax would be help­ing to raise 1.8 bil­lion Pol­ish zlo­tys for state cof­fers this year. KPGM Pol­ska Miedz SA, the country’s most prof­itable com­pany and sole cop­per pro­ducer, is now con­sid­er­ing return­ing to the debt mar­kets for the first time since 2003 should the gov­ern­ment approve this new min­ing tax. The com­pany will need to pay 1.8 bil­lion zloty in new taxes this year.

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.

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