Gold Market Radar (July 23, 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.