Gold Market Cheat Sheet (June 27, 2011)
Spot gold closed at $1,503.20, down $31.85 per ounce, or 2.07 percent for the week. Yet gold equities, as measured by the Philadelphia Gold & Silver Index, delivered a modest gain of 0.93 percent. The U.S. Trade-Weighted Dollar Index rose 0.85 percent for the week.
Strengths
- The import of gold and silver by India has risen 222 percent between April and May 2011, as compared to a year ago. In the month of May alone, imports were a staggering $9 billion, a growth of 500 percent compared to the month a year ago. To put this into perspective, the yearly average of gold imports by India is $22 billion, indicating in May alone they already reached 40 percent of the average.
- Peoples Bank of China (PBOC) has announced that in view of the rising demand for their Panda coins, the output number of gold Pandas will be raised from the previously announced 300,000 units to 500,000 this year. The smaller coins in the series will have their maximum circulation numbers increased from 200,000 coins to 600,000 for each series. Also, the PBOC says that it is doubling the maximum issuance of silver Panda coins from 3 million to 6 million. To emphasize this growth in demand, issuance in 2010 was just 1.5 million.
- The big rises in the maximum issuance for the smaller gold coins and the series of silver Pandas is yet another indication that not only is demand exploding for precious metals among the Chinese growing middle class, but also confirmation that the government is encouraging its citizens to buy precious metals.
Weaknesses
- The gold price closed the week lower as the U.S. dollar spiked higher. The price of gold faced heavy selling pressure, as did stock and commodity prices, after European Central Bank President Jean-Claude Trichet warned that the sovereign debt crisis poses a “serious threat” to the financial stability of the European Union. In addition, President Obama announced oil would be released from the Strategic Petroleum Reserve in a concerted effort with other nations to help bring down energy prices.
- The Purchasing Managers Index in China sank to 50.1, its lowest level in 11 months. A reading of less than 50 would signal contraction in the country’s economy. Premier Win Jaiaboa wrote a column in the Financial Times on Friday, stating his belief that the policies have firmly brought price rises in China under control.
- The Obama administration extended its emergency ban on new mining claims around the Grand Canyon until December 20, 2011, enhancing the probability of the ban becoming permanent. The two-year moratorium on new mining claims in the Grand Canyon was set to expire on July 20.
Opportunities
- Representative Ron Paul has not abandoned his quest for an independent audit of U.S. gold reserves. The Gold Reserve Transparency Act of 2011 would not only request an independent audit of the 5,000-plus tons of gold bullion stored in Fort Knox, but also audit U.S. gold reserves held in Denver, West Point, and the New York Federal Reserve Bank. Rep. Paul wants some of the bullion to be tested by an independent laboratory to prove that the bars are investment grade gold bullion.
- Eric Thorson, inspector general of the Department of Treasury, last September became the first outsider in 37 years to be granted full access to Fort Knox. Additionally, only one member each of the Senate and House has been allowed to tour Fort Knox since the 1970s. In testimony before the House, Rep. Paul also questioned whether gold that is pledged to the International Monetary Fund (IMF) by the U.S. should be considered as part of the U.S. reserve base.
- According to Mexico’s Chamber of Mines, revenue from mining was expected to surpass $13 billion in 2010, making mining the third-largest generator of revenue in its economy. There are a number of world-class deposits being developed in the country and around 740 active exploration projects.
Threats
- Brazil is considering a new tax on large mining projects as part of the government's overhaul of the mining code. The proposal would levy the tax on 25 percent of the existing mining concessions and include a potential increase in royalties that companies must pay to the government.
- The mining industry opposes tax increases, particularly the royalty increase, saying that it would reduce Brazil's competitiveness because mining companies already have a high overall tax burden. The government expects to send a draft bill to Congress in the second half of 2011, after more than a year of discussions with the industry.
- Rising reserve ratios instituted by the People’s Bank of China has led to cash hording and the inversion of the swap rate curve as China’s 7-day repo rate surged to a 3-year high of 8.79 percent. The last time the country’s swap curve inverted was during the failure of Lehman Brothers.
