Gold Market Cheat Sheet (May 23, 2011)

Gold Market Cheat Sheet (May 23, 2011)

On Friday, spot gold closed at $1,512.30, up $17.28 per ounce, or 1.16 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 2.06 percent. The U.S. Trade-Weighted Dollar Index lost 0.14 percent for the week.

Strengths

• Investment demand was once again the major driver of gold demand growth during the first quarter of 2011, according to the World Gold Council's Gold Demand Trends report. During the first quarter of the year, investment demand grew by 26 percent to 310.5 tonnes from 245.6 tonnes in the first quarter of 2010. But, while overall investment did well, the majority of the growth was seen in the market for bars and coins.
• Investment demand will continue to be driven by “uncertainty over the U.S. economy and the dollar, ongoing European sovereign debt concerns, global inflationary pressures and continued tensions in the Middle East and North Africa,” said the World Gold Council’s managing director. "Central bank purchases jumped to 129 tons in the quarter, exceeding the combined total of net purchases during the first three quarters of 2010," he said. "The resilience of gold during recent volatility in the commodities market exemplifies the strength of the global gold market and its unique demand drivers," he added.
• Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide. The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1. The last time sales reached that level, bullion rose 21 percent in the next year.

Weaknesses

• Zambia raised the price of electricity for mining companies by 30 percent. Frederick Bantubonse, the general manager of the Chamber of Mines of Zambia, an industry body which represents foreign mining companies, said the higher cost of electricity would affect profitability. The cost of electricity to the mines was last raised by 35 percent in 2008.
• Macquarie Equities research noted that capital costs have recently risen to peak 2007 levels. Gold company dividend growth has been well below expectations as many management teams appear reticent to return cash to shareholders despite admittedly overpriced acquisition opportunities.
• As demand for gold rises, so do fraudulent gold schemes. A U.S. federal judge has shut down a Florida precious metals telemarketer for allegedly bilking senior citizens and the other consumers out of more than $37 million. This is the third such action in the United States within the last two months.
• Another area ripe for disappointment in the U.S. is the offering of junior mining companies which have avoided a Canadian stock exchange listing. Canada requires a mining company to hire an independent person to provide a public report on a company’s asset base before a stock exchange listing can be obtained. However, in the U.S., the company only has to disclose to investors that there is no independent review of the assets.

Opportunities

• In a discussion on the outlook for the yellow metal, the long-time precious metals bull, billionaire, and founder of Sprott Asset Management stated that “The market has judged the world’s reserve currency as gold.” In spite of the recent weakness in precious metals, Sprott reiterated his stance that gold and silver provide investors with protection against problems in the banking system and further debasement of the U.S. dollar and other fiat currencies. Sprott elaborated on issues in various countries’ banking systems, “If you’re in Ireland today, you don’t have any money in banks, particularly if you’re non-Irish. If you’re in Greece you’re taking your money out. In Portugal you probably have concerns. If you have a fear of the banking system, you go to things like gold.”
• “There are more factors than at perhaps any other time in history that would suggest to investors they should own gold,” said Michael Haynes, chief executive officer of American Precious Metals Exchange, an online bullion dealer that had its three best sales weeks ever in April and May. “We don’t know if the euro is going to crack or stay and the dollar is facing challenges as the world’s reserve currency.” Haynes, based in Oklahoma City, expects to ship as many as 15 million precious metals coins or bars this year, double last year’s figure.
• The University of Texas Investment Management Co., the second-largest U.S. academic endowment, said April 14 it took delivery of about $1 billion of gold bars. Central banks are adding to their reserves for the first time in a generation. Mexico, Russia and Thailand bought approximately a combined $6 billion in February and March, International Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18 percent of all the metal ever mined, the data shows.

Threats

• Namibia is looking to introduce a minerals windfall tax for the state to benefit more from its vast mineral resources, Mines and Energy minister Isak Katali said. The move would be the latest in a series of moves by governments in the region seeking to benefit from profits made by mining companies. Katali went on to state, "It is my view that as the custodian of the mineral resources, the state should also benefit in good times beyond normal taxes and royalties." Namibia already worried investors with a recent decision to grant future rights to strategic minerals, including uranium, to a state company.
• After decades of political turmoil, Guinea's first freely elected government needs to make reforms across the board and many are needed to clean up its mining sector. But, too many too soon could scare off investors. Guinea depends on mining for 70 percent of the government’s revenue. "From one perspective, the government of Guinea is trying to clean up the books, which makes sense because Guinea is a country rich in resources but has not benefitted from them at all," said Samir Gadio, analyst at Standard Bank. "But from a perception standpoint, it is a bit tricky.”
• Jeff Currie, who heads commodity research at Goldman Sachs, suggested that the end of quantitative easing (QE) will have a negative impact on gold, but demand for oil and industrial metals should be supported if there is real economic growth.