Gold Market Cheat Sheet (May 9, 2011)
On Friday, spot gold closed at $1,495.15, down $68.55 per ounce, or 4.38 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 9.01 percent. The U.S. Trade-Weighted Dollar Index rallied 2.58 percent for the week.
Strengths
- Mexico massively ramped up its gold reserves in the first quarter of this year, buying over $4 billion of bullion as emerging economies move away from the ailing U.S. dollar, which has dipped to a two and a half year low. This was the third biggest off-market purchase of gold by any country over the past decade, and Mexico’s reserves went from just 6.84 tons at the end of January to 100.15 tons, or 3.22 million ounces, by the end of March.
- The International Monetary Fund also reported that Russia and Thailand purchased 18.8 and 9.3 tons to bring their respective totals to 811.1 and 108.9.
- The gold purchases by Mexico, Russia, and Thailand are consistent with a change that occurred in 2010, in which central banks became net buyers of gold rather than net sellers for the first time in nearly two decades. This change in trend should be viewed as a positive sign for the gold price.
Weaknesses
- Some prominent hedge funds have started selling their gold and silver positions in recent days “signaling the sector’s rally may be entering more dangerous territory.” One hedge fund manager thinks the chance of deflation has been reduced, lessening the need for large precious metals positions. The huge volume in silver ETFs may suggest that some investors are receiving margin calls.
- South Africa’s powerful National Union of Mineworkers (NUM) will hold a one-day protest over safety in the North-West province, which could affect some mining operations in the area. While some operations may be affected by the protest, the nationwide event might shut down the mines. Miners in Africa’s biggest economy have been hit in the past by a raft of strikes over wages, which dented output after unions demanded above-inflation increases, which employers said they could not afford.
- German politicians don’t want to give Portugal its bailout cash until it sells its own assets. Norbert Barthle, who is a member of Angela Merkel’s party and budget speaker, as well as his Social Democrat rival, Carsten Schneider, have called for Portugal to think about selling its gold. Frank Schäffler, a member of the FDP party in coalition government, is more adamant, saying that Portugal should have to “sell their silverware,” including gold, before they receive a bailout.
Opportunities
- Ghana’s annual gold output in 2011 should be higher than last year’s run of about three million ounces, although rising electricity costs could crimp output in the future. The country has benefited from record gold prices, with output rising 1 percent in 2010 to 2.97 million ounces.
- Many predict China will introduce further monetary tightening pressures in an attempt to curb inflation. India’s central bank raised key interest rates this week, the ninth hike in just over a year.
- Europe dashed expectations that another interest rate hike was imminent. Globally this furthers gold’s appeal versus owning the debt of counties that can’t afford to pay interest on their borrowings. In the short-term, this could lend support to the dollar as debt markets reposition.
Threats
- The CME Group raised the silver margin requirement four times in one week and this not only sent silver prices down by more than 20 percent this week but also spilled over to liquidations in other commodities. Not until Friday did the markets see a positive close in silver or gold.
- Peru’s next president, to be elected on June 5, will inherit hundreds of social conflicts that threaten to paralyze mining and energy investments in one of the world’s fastest-growing economies. Some $40 billion in mostly foreign investment has been lined up for Peruvian projects over the next decade, equal to about one third of Peru’s gross domestic product. But much of that could be rerouted if the government fails to defuse strident opposition in rural areas to the extractive projects that local residents say will cause pollution, use up scarce water supplies and fail to lift them from poverty.
- South Africa’s big three gold miners will report drops in production in the first three months of 2011 but earnings will be lifted for at least two of the companies because of other factors. Production will be down as seasonal factors such as higher power supply tariffs bite into output, though some analysts say things seem sluggish based on normal March-quarter standards.
