Gold Market Cheat Sheet (March 14, 2011)
For the week, spot gold closed at $1,417.45 per ounce, down $13.45 per ounce, or 0.94 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 4.19 percent. The U.S. Trade-Weighted Dollar Index gained 0.38 percent for the week.
Strengths
- In the World Exploration Trends 2011 report, Halifax, Nova Scotia-based Mineral Economics Group (MEG) reported a combined 2010 exploration budget of $11.2 billion. This was a 45 percent increase over the 2009 exploration budget. MEG predicts exploration budgets will experience another healthy increase this year, “rising to a new high-water mark for worldwide nonferrous exploration spending.”
- Acquiring firms from Canada continue to top the list in mining M&A, at 36 percent of all resource M&A transactions. The U.S. and Australia tied for second at 16 percent, according to PwC’s Mining Deals report. Chinese firms represented only 6 percent of global mining mergers and acquisitions in 2010, but the country will take a more aggressive approach to mergers and acquisitions this year, PwC said.
- Australia’s Resource Minister noted that Chinese firms should be more successful in getting investments in Australia’s mining sector approved because they now know how to navigate the process.
Weaknesses
- Peru’s mining society warned on Wednesday that political campaign talk about mining royalties and taxes could scare away investors. The Fraser Institute, a Canadian research group, recently released a survey of 494 global mining companies that ranked Peru 48 out of 79 countries or jurisdictions, down from its 2009 ranking of 39.
- A scarcity of skilled labor is forcing junior miners and developers to dig deeper to attract and retain talent, a trend that is likely to accelerate cost increases, squeeze profit margins and threaten some marginal projects. To make matters worse, rising oil prices can lead to deep-pocketed energy companies poaching workers from the mining side.
- Mining companies within Brazil say they believe their government is overcharging for mineral royalties, taking away billions of dollars from the companies.
Opportunities
- Li Yining, a member of the Chinese People’s Political Consultative Committee, an advisory body to the national parliament, said that China should use the gold to hedge against risks of foreign currency devaluations. “China should increase its gold reserves appropriately, and China must take every chance to buy, especially when gold prices fall,” said Li, as quoted by the official Xinhua news agency.
- Federal Reserve Bank of Atlanta President, Dennis Lockhart, stated on Monday that the Fed cannot rule out further asset purchases following the end of QE2 on June 30 of this year. Lockhart also noted that despite the falling unemployment rate and improving levels of job creation, “it is premature to declare a jobs recovery firmly established.”
- Doug Casey, founder of Casey Research, noted at the Prospectors & Developers Association of Canada convention in Toronto that, “Central banks all over the world are creating trillions of currency units and that, in turn, is creating lots of bubbles. It’s very probable that they’re going to ignite a bubble in gold and they’re going to ignite a really wild bubble in small resource stocks.”
Threats
- Bank of America Merrill Lynch lowered their outlook on free cash within the North American precious metals industry. They estimate the industry will generate $6.3 billion of free cash flow in 2011, which is down by more than half compared to their prior 2011 free cash flow estimate of $13.1 billion. This is due to companies reporting higher than anticipated capital spending plans for 2011, strong commodity prices leading companies to advance development projects more rapidly, and expanding existing mines.
- The decline in free cash flow may restrain some companies from making acquisitions this year absent a boost in metal prices.
