Gold Market Cheat Sheet (June 6, 2011)
On Friday, spot gold closed at $1,541.95, up $5.55 per ounce, or 0.36 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 2.49 percent. The U.S. Trade-Weighted Dollar Index lost 1.65 percent for the week.
Strengths
- Silver coin sales by the U.S. Mint are reported to be at their highest level in 25 years, with sales of 3.65 million ounces of new American Eagle silver coins in May. May sales were 30 percent higher than April's 2.819 million ounces, which in itself was the best ever April on record. This brings the total sale of American Eagle silver coins to 18.9 million ounces so far this year. Last year's sales over the same period amounted to 15.2 million ounces.
- The U.S. Mint has also announced that effective this week it will be adding production from its San Francisco facility, which has the capacity to mint up to several hundred thousand coins per week. Previously all the American Eagle silver coins had been minted at its West Point plant.
- Silver coins issued by the San Francisco mint should lend a boost to their popularity with coin collectors.
Weaknesses
- As anti-mining protests in Peru threaten the upcoming presidential elections, Peru's President Alan Garcia Perez and the Ministry of Energy and Mines have suspended mining concessions in several of the nation's provinces for the next 12 months. Anti-mining protesters said the core issue is that some sectors of the population do not want mining activity in Peru because it allegedly contaminates water needed for agriculture.
- The Shanghai Gold Exchange (SGE), perhaps in concert with CME regulators, adjusted silver forward contract margins six times last month as prices fluctuated widely, tracking the roller coaster ride in global spot prices. Margins were raised to as high as 20 percent on May 6. The banking regulator asked banks in Shanghai to notify clients through text messages or calls whenever the SGE raises margins or adjusts the daily trading limit for its silver forward contract, to ensure investors are informed of their exposure and can cut positions if necessary, the Shanghai Daily said.
- In its latest quarterly report on gold hedging, London's VM Group sees a small increase in the first quarter of 2011, bucking the downward trend which has been in place virtually every quarter since February 2002. It will be interesting to see whether this increase in the global gold hedge position is a sign of things to come and/or if it represents the beginning of doubts in the mining community of the sustainability of the gold price in the short to medium term.
Opportunities
- Gold is in the midst of a 20-year upward climb, according to The Great Super Cycle Author David Skarica in his interview with The Gold Report. When asked about his view of a mega super cycle Skarica said, “These cycles usually move in 15- to 20-year periods. If you look at gold bottoming in 2001 or 1998, depending on your view, you can see we at the very least will move higher in 2013 and more probably into 2015 to 2020. The fundamentals back it up as the problems with unfunded liabilities and the U.S. deficit will continue to put long-term pressure on the dollar and upward pressure on gold.”
- Potential fraudulent business practices were flushed out this week concerning what was thought to be a long time reputable Chinese operator in the forest products industry. The scare has caused a number of Chinese listed companies in the North American markets to take a hit to their share price as investors try to understand the implications of this issue.
- The China news coupled with weaker jobs data in the U.S. has raised investor awareness of where they can safely put their money and gold looks to be a beneficiary of this trade. Gold equities have lagged the rise in bullion this year, but investors in gold stock already have the assurance of independent verification of a company’s reserve and resource bases by independent parties. Regulators in the mining industry are much further down the learning curves on protecting investors’ interests in this sector.
Threats
- Australia’s proposed carbon tax could cost the mining sector as much as $25 billion through 2020 and cut investment in the sector as much as 13 percent. Australia's climate adviser Ross Garnaut said a carbon price of $28 per ton would be necessary to achieve Australia's commitment to cut emissions by 5 percent by 2020. He said such a price would raise $12.2 billion in its first year, 2012 to 2013. Mining companies have called for a price of $11 per ton, and green groups want $43. The government has said the price would be "south" of $43.
- With China trying to bring inflation under control, any hikes in coal or iron ore prices from Australia will likely have some negative effects on China, which is heavily dependent on raw materials imported from Australia.
- S&P views Chinese government policymakers’ "continued reliance on a centralized macroeconomic management as a credit weakness of China." If administrative measures are based on untimely or inaccurate analyses of the economic situation, "they could have abrupt or unpredictable effects….In such a scenario, demand for commodities could fall precipitously as investment is curtailed," S&P suggested.
