Gold Market Cheat Sheet (April 4, 2011)

Gold Market Cheat Sheet (April 4, 2011)

For the week, spot gold closed at $1,428.80, down $0.94 per ounce, or 0.07 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver (XAU) Index, rose just 0.13 percent. The U.S. Trade-Weighted Dollar Index (DXY) resumed its fall and gave up 0.49 percent for the week.

Strengths

• It appears that Chinese gold demand continues to run at a very high level. Fabricators in China are reporting difficulty in obtaining sufficient supplies for their businesses. China’s English Language TV station, part of state-owned CNTV, reported that gold demand is going “through the roof” despite the post-Chinese New Year period usually being a slow one for gold sales.
• One gold fabricator in China noted that sales for his business have been growing at the rate of 20 percent a month over the last couple of years. Gold demand in China has largely offset the slowing rate of demand for exchanged traded bullion funds in the U.S.
• The French Mint reported a sharp rise in demand for their offerings of a growing selection of gold and silver coins to lure collectors and people looking for a secure investment last year. “There is a real collector’s phenomenon around the coins that we produce,” the Mint’s chief executive told reporters.

Weaknesses

• Foreign mining firms in Zimbabwe must sell a majority stake to local black investors within six months, according to a release from the government. It also said companies had 45 days in which to submit details of how they planned to transfer ownership. Once published, it effectively becomes law.
• The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD), posted its biggest quarterly drop in assets since its inception during the first three months of 2011. The decline was fueled by the prospect of interest rate hikes and gains in other commodities drove investors to sell. The SPDR Gold Trust’s gold holdings were down 5.4 percent to 1,211 tons during the quarter. However, their holdings may have declined due to other gold bullion products, which have lowered their fee structures and can be more tax efficient to investors.
• “Concerns about inflation would trigger demand for gold as a store of value, but the precious metal’s bull run may be near its end,” China’s Central Bank said this week. “We need to note that gold prices have reached historical highs, and its downward risks should not be overlooked.”

Opportunities

• Ecuador expects mining companies to invest $7 billion in gold and copper projects over the next seven years, as the OPEC member tries to diversify its economy by encouraging mining activity. Natural Resources Minister Wilson Pastor said five project contracts will be signed in the next few months. “The investment in the five projects will reach $7 billion in an accumulated way. The cycle to put the mines at full capacity will last approximately seven years,” Pastor told reporters.
• Jason Hamlin, founder of Gold Stock Bull, recently noted “I believe gold has a good chance of hitting $1,800 per ounce by year-end. That’s been my target. Gold could then easily pass its official inflationary adjusted high of $2,300 per ounce next year. The true inflation-adjusted high for gold is somewhat closer to $5,000 per ounce if we’re not using the suppressed government statistics. I think there’s a good chance that gold will surpass that figure before the bull market is over.”
• GFMS, one of the world’s foremost metals consultancy firms, reiterated its bullish outlook on gold due to numerous economic and political factors. GFMS sees a gold price of $1,500 per ounce with the $1,600 mark within range this year. The firm says their outlook depends on how major economies of the world grow and how governments of major economies attempt to maintain this growth.

Threats

• Peruvian presidential candidate Keiko Fujimori said that if elected she might tax the windfall profits of firms in Peru’s vast mining sector. Two other leading candidates in the April 10 race, former President Alejandro Toledo and Ollanta Humala, have also expressed support for more taxing of mining companies in Peru, one of the world’s top exporters of minerals. However, mining companies bristle at what they have called populist policy proposals and say higher taxes would discourage billions of dollars in foreign investment.
• Indonesia will need between $500 million and $1 billion a year in new investments for exploration activities to maintain present levels of mineral production, the Indonesian Mining Association claims. Association chairman Martiono Hadianto says that in the past decade, Indonesia allocated only $10 million a year for exploration to find new mineral reserves in existing mining areas. He added that the Indonesian government had to work harder to create a more competitive and investor-friendly fiscal regime in order to attract more investments to the mining industry. “The mining industry is capital-intensive. The government needs to offer competitive incentives to be able to compete in attracting investors to conduct businesses in Indonesia,” he suggested.
• For a number of the large low-grade multimillion ounce gold deposits being hyped by the Street today, investors need to be cautious. The primary concern that is compounded at these projects right now is capital and operating costs. The lower the ore grades, the more capital will be at stake to achieve throughput rates that can carry the economics. When financing these types of projects, they are more likely to be forced to sell their gold forward in order to lock in a known revenue stream. However, these hedging arrangements do nothing to protect the investor from rising costs and project failure.