Gold Market Diary (June 28, 2010)
For the week, spot gold closed at $1,255.60 per ounce, down $1.20, or 0.10 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index, shed 0.27 percent. The U.S. Trade-Weighted Dollar Index fell 0.46 percent.
Strengths
- After a rocky start for gold this week, due to China’s intention to let its currency appreciate, bullion came close to eclipsing its all-time high by Friday close. Spreads on Greek credit default swaps are now higher than before Europe announced its massive plan to restore credibility to the euro.
- Saudi Arabia moved up to become the 16th largest country in terms of gold reserves with 322.9 metric tons. This amount held in Saudi Arabia’s central bank more than doubled previous estimates.
- China’s largest gold producer, China National Gold (a private company), will purchase and process gold concentrates under a long-term contract from the Kensington Mine in Alaska. China offered payment for the gold within seven days of delivery versus the traditional three-month delay used by many smelters. This provides an innovative source for China to increase its gold holdings by not going out to the open market to directly acquire gold.
Weaknesses
- Indian gold demand dipped by more than 50 percent from April to May as strong gold prices due to eurozone problems put some buyers on the sidelines.
- Australia and China signed more than $8.8 billion worth of commercial and mining deals. This is a sign that Australia’s proposed mining tax has not deterred China, Australia’s largest export market.
- What is bad for the major publicly listed mining companies is an opportunity for the Chinese government to establish more direct ties to the source of the minerals they need versus competing to buy them in the public markets.
Opportunities
- Over the last 10 years, gold and gold-mining stocks have been a good investment. For the first five years of this period, the gold-mining equity indexes outperformed the gold price due to expanding profit margins. In the last five years, gold has outperformed the gold-mining indexes as margins were compressed by rising costs from fuel, steel, reagents and labor. With gold prices significantly above the all-in marginal cost of production, we are now likely to see the gold miners outperform bullion.
- All but two U.S. states will have budget deficits this year, with the combined shortfall likely exceeding $300 billion. That would far surpass Greece’s expected 2010 budget shortfall of $28 billion. As financial problems persist, gold’s safe haven attributes look more attractive.
- A recent Gluskin Sheff report by David Rosenberg, Chief Economist & Strategist, highlights the impact of bear markets over the past 125 years. Looking at the Dow Jones Industrial Average (and adjusting for inflation), the average bear market of 16 years pretty much wipes out gains from the previous bull market. Assuming 2 percent inflation and that the current bear market ends in 2016, Rosenberg says, the Dow could trough at 5,000. At that point, he predicts, gold would likely be $5000 per ounce. The last time gold had a major run (1970 to 1980), the S&P 500 delivered an average annual real return of 0.8 percent for the decade, while the Toronto Gold & Precious Minerals Index, in U.S. dollar terms, compounded at a real return 25.1 percent per year.
Threats
- The Guatemalan government asked a large Canadian-based mining company to suspend operations temporarily while the government addresses accusations of human rights claims made by an activist group. The company has not complied with the request.
- A gold miner in Mexico facing labor problems at one of its mines fired all 400 miners for going on an illegal strike. Management may find it difficult to re-establish good relations with the community.
- Australia’s new prime minister, Julia Gillard, has not moved away from her predecessor’s plans to introduce a super profits mining tax. Gillard did, however, emphasize that she wants to make sure Australians get a fair share of the mineral wealth.
