Gold Market Cheat Sheet (July 4, 2011)
For the week, spot gold closed at $1,487.78 per ounce, down $14.87 per ounce, or 1.0 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 3.94 percent. The U.S. Trade-Weighted Dollar Index fell 1.81 percent for the week.
Strengths
- The U.S. Mint released one of their most-sought-after coins, the 2011 American Eagle Silver proof coin, limiting sales to 100 coins per customers. The Proof American Silver Eagles were cancelled in 2009 due to record demand for the associated bullion American Silver Eagles. The 2010 Proof American Silver Eagle sold 860,000 coins before the Mint declared a sellout in December 2010.
- A survey of 80 central bank reserve managers predicted that the most significant change in their reserves over the next ten years would be the addition of more gold. Furthermore, over the next year the respondents forecasted that the price of gold will be the best performing asset class, citing sovereign debt defaults as the principal risk to the global economic landscape.
- China’s first precious metals spot exchange began trading Tuesday in Chengzhou in Hunan Province. The Hunan South Rare Precious Metals Exchange is based in China’s silver capital in Yongxing County. “By launching such an exchange, China can solve the problems that have long plagued its precious metals industry, such as high logistics costs and lack of capital,” said Zhang XiaoJun, director of the Precious Metals Legal Commission.
Weaknesses
- South Africa’s gold output during the first quarter of this year fell 9.3 percent compared to the fourth quarter of 2010. The Chamber of Mines also revised total gold production for 2010 to 6,751,506 ounces from the 6,766,709 ounces published earlier.
- Mining companies, who had hoped democracy would lead to a better investment climate in the country of Kyrgyzstan, are finding the going tougher than expected. “The last two governments didn't encourage any great confidence in their ability to create a level playing field. There’s a hope that things might get better under the new government, but it’s very much ‘wait and see’,” says Nick Chalmers, mining analyst at Mirabaud Securities.
- Australian Prime Minister Julia Gillard reaffirmed this week that the proposed new mining tax would go ahead as planned. Gillard also reaffirmed that the carbon tax would also proceed though she has distanced the Government from Labor’s necessary partner, the Greens, who want the mining tax to be higher. Greens leader, Senator Bob Brown, indicated the ultimate target is to wipe out coal mining in Australia.
Opportunities
- U.S. Senators introduced the Sound Money Promotion Act, which would remove the tax burden on gold and silver coins that have been declared legal tender by the federal government or state governments. On May 9, the state of Utah became the first state to recognize such gold and silver coins as legal tender for use within the state, and similar legislation has been introduced in 12 other states.
- Jeffrey Mosseri, founder of Greystone Asset Management, recently asserted his opinion that although gold may see a correction, “it looks as if gold could just build and build on these numbers and go much higher over time.”
- Gold production has increased by a factor of 2.1 from 1959 to 2010. At the same time, the world population has been multiplied by a factor 2.2. Thus we produced more or less the same amount of gold per inhabitant as in 1959. According to this estimation, the world population should reach 7.2 billion in 2020 and 8.2 billion in 2030. This should indicate to us a “necessary” gold production of 2,803 tons in 2020 and 3,034 tons in 2030. Global gold production reached 2,500 tons in 2010.
Threats
- Commodities are due to be weak over the next several months, having completed about half of an expected 20 percent correction, according to UBS. The lack of any more government stimulus would likely leave commodities struggling. However, gold would hold up relatively better than other commodities due to its safe haven role.
- David Brown, CEO of Impala Platinum Holdings, said, “Investors, the traditional suppliers of risk capital to this industry, are getting cold feet. The risk associated with future investment in South African mining has increased considerably as seen from the outside world because of dangers including nationalization.”
- Governments in mineral-rich countries must steer clear of the “blind alleys” of nationalization and excessive tax if they want to attract continued investment from global miners, Anglo American CEO Cynthia Carroll said. “Governments tempted to move in this direction convince themselves that necessary mining investments in their countries will continue unabated. They are wrong; miners would be attracted instead to countries with stable and fair fiscal regimes.”
