Gold Market Cheat Sheet (April 11, 2011)
For the week, spot gold closed at $1,474.93, up $46.13 per ounce, or 3.23 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 6.52 percent. The U.S. Trade-Weighted Dollar Index tanked 1.29 percent for the week.
Strengths
- The gold price reached a new record each of the last three days this week, rising above $1,470. This surge is due to several factors such as the European Central Bank raising interest rates, another disaster in Japan, and talks of a $130 billion bailout in Portugal.
- DundeeWealth’s chief economist, Martin Murenbeeld, continues to believe that gold and other commodities are headed toward being a separate asset class, and expects to see increased levels of managed money being invested in commodities.
- Nicholas Brooks, head of Research and Investment Strategy at ETF Securities, noted the growing demand for gold as an alternative currency, building up steadily since the financial crisis of 2008. He cites this as one of the key factors underlying the current strength in the gold price and as one that is likely to continue. Brooks also said, “Going back to the first euro crisis in early 2010 there were very substantial inflows into gold of all kinds with gold exchange traded products seeing very substantial in flows during that period.”
Weaknesses
- South Africa’s National Union of Metal Workers said it would strike if it did not get more than five times the current 3.7 percent inflation rate in its country.
- Labor costs in South Africa rose by 10 percent last year, but productivity only gained by 3 percent while almost 1 million laborers lost their jobs over the past two years.
- Rising labor and energy costs will be a headwind to South African gold and platinum producers, but this is one of the best-endowed countries in the world for mineral riches. South Africa’s top three gold mining CEOs are now more seasoned and have made progress in advancing their companies.
Opportunities
- In a panel discussion at the Reuters Global Mergers and Acquisitions Summit, investment bankers said M&A deal volumes had a long way to go, and the average size of larger deals would be around the $1 billion mark, or double last year’s level.
- The World Silver Survey showed global silver investment demand jumped 40 percent last year. With the U.S. and Europe both continuing to demonstrate no significant steps toward budget rationalization, silver is becoming the metal of choice for small-scale investors looking for stability.
- Eric Sprott, a leading expert on the silver market, who said gold would be the leading investment of the last decade, believes silver will perform even better than gold now.
Threats
- The Assembly Taxation Committee in Nevada plans to discuss Assembly Bill 428, which would slash net proceeds of mines’ tax deductions by 60 percent, limiting state tax deductions for mining costs to 40 percent. This could be a headwind for existing precious metal producers in the state and could change the economics on new mines anticipated to come into production within Nevada.
- For large low-grade multimillion ounce gold deposits being hyped by the street, a change in tax rates could have a significant effect on future returns and make the difference in whether investors will risk their capital.
