Gold Market Cheat Sheet (May 2, 2011)

Gold Market Cheat Sheet (May 2, 2011)

On Friday, spot gold closed at $1,563.70, up $57.45 per ounce, or 3.81 percent from the Thursday close prior to Good Friday. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 1.58 percent. The U.S. Trade-Weighted Dollar Index slid 1.46 percent over this period.

Strengths

• Following statements made by Fed Chairman Bernanke, the gold price reached a new record high of $1,543 per ounce. Chairman Bernanke maintained the Fed’s stance on monetary policy in spite of rising inflationary risks to the U.S. economy. While the Fed may not buy more bonds, there is some speculation that the Fed may sell a portion of the assets it bought at a loss, but roll the proceeds into the long end of the Treasury curve to try to bring down long-term interest rates.
• Sales of gold by signatories to the third Central Bank Gold Agreement (CBGA3) remain negligible, accounting for less than one ton so far during the second year of the agreement. Overall, this confirms the general consensus that central banks are loath to sell any of their gold in light of the appreciating price.
• Despite a 100 percent jump in price in just over six months from October 2010, demand for silver continues in India fueled by Akshaya Tritiya. The festival, the golden day of eternal success, falls on May 6 this year. Silver demand in India is expected to jump 10 to 15 percent from the current level of about 3,000 tons per year.

Weaknesses

• The media has run several stories speculating on a bubble in silver, with expectations that the price will inevitably fall. Shorting silver is not easy, and as a consequence, speculators have resorted to shorting shares in silver-producing companies, resulting in these shares lagging the metal.

Opportunities

• As of April 2011, there are at least 115 Indian billionaires worth a combined $195 billion and more than 275 individuals worth more than $500 million, potentially providing a growing pool of gold buyers.
• In an article on Mineweb.net, Ben Traynor outlines Gresham’s Law which, in its simplest form, is that bad money drives out good money. In practice, when governments start diluting the metal content of coinage with less valuable metals, the public tends to hoard all the older purer coins and only circulate the less valuable coins. The U.S. went from a silver quarter in 1964 to copper quarters with a silver clad, and eventually to a nickel-clad quarter. Pennies also saw this transition from copper to zinc cores with just a copper coating. Mr. Traynor also outlines what the State Bank of Vietnam is doing to combat its citizens from using gold as a currency instead of the dong despite its citizens seeing growing trade deficits, rising inflation and a falling currency. Yet, total gold buying in Vietnam amounted to 3.1 percent of GDP while India’s appetite for gold was 2.5 percent of their GDP, and China’s was a mere 0.4 percent of GDP.
• James West of the Midas Letter believes gold and silver are on a spectacular rise and forecasts this as the beginning of a global revolution that could result in long-term opportunities for gold and silver investors. West said, “In the last 30 days, gold has risen in price by $90 an ounce. Now that it’s above $1,500 an ounce, with a clear eye and ambition for the next level - $1,600 - a cacophony of know-it-all voices are going to proclaim the imminent end and catastrophic destruction of the gold bubble. This is no bubble. This is the beginning of a global revolution.”

Threats

• Zimbabwe is considering legislation to force miners to fund development in local communities. Under proposed amendments to the Mines and Minerals Act, mining companies would be compelled to pay for development in communities in the mineral-rich nation where they are based. They would also need permission from local community leaders before starting operations. Foreign mining companies are already facing a May 9 deadline to submit plans on how they will transfer 51 percent of their local equity to the southern African country.
• The Namibian government’s plans for legislation that will see all mining and exploration rights go to a state-owned company will hurt the sector. The mining minister told parliament the cabinet had approved proposals to declare uranium, copper, gold, zinc and coal as strategic minerals and give the state exclusive exploration and mining rights over them.
• Guinea’s government aims to more than double the stake it can hold in mining projects and to toughen procedures for issuing developing permits, according to a draft of the West African state’s new mining code. The draft mining code would give the Guinean state 15 percent of mining projects, as well as the option of purchasing an additional 20 percent, bringing the total potential state share to 35 percent. Guinea President Alpha Conde signaled that this change is a priority, stating earlier this year that he wants Guinea to have a blocking minority stake in all of the country's mining projects, something requiring at least 33 percent.