Gold Market Cheat Sheet (July 25, 2011)

Gold Market Cheat Sheet (July 25, 2011)

For the week, spot gold closed at $1,601.27 per ounce, up $7.72 per ounce, or 0.48 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 1.57 percent. The U.S. Trade-Weighted Dollar Index slid 1.18 percent for the week.

Strengths

• Gold finished the week above $1,600, despite some investors selling in an attempt to take profits.
• Companies which currently produce gold outperformed their peers in the exploration and development stage this week. This is a trend that has dominated trading activity for much of the last three months.
• One of the companies in the exploration and development space that bucked the trend in its peer group was Romarco Minerals. Its stock rose 10.24 percent this week on a new high-grade drill hole that should expand its underground potential.

Weaknesses

• Lake Shore Gold’s share price was pummeled roughly 28 percent this week after the company announced disappointing production results and reduced its production forecast for the year.
• Another headwind to gold equity performance has been the number of junior-tiered companies trying to raise money as gold has breached $1,600. There appears to be too many projects competing for funding without a sound resource base or reasonable capital requirements.
• Zimbabwe has rejected all 175 local ownership proposals it received from foreign mining companies and will expel any firms that don't meet a September deadline on majority black ownership. Under the controversial law, foreign miners operating in Zimbabwe must sell a majority stake to local black investors or face losing their assets. This is negative for several of the platinum mining companies which operate within the Zimbabwe.

Opportunities

• The House Natural Resources Committee unanimously approved the National Strategic and Critical Minerals Policy Act of 2011. The bill directs the Secretary of the Interior to coordinate a government-wide inventory of the nation's mineral resources and availability to meet current and future strategic mineral needs. It also requires the Interior Secretary to evaluate factors affecting domestic mineral development, including workforce, access, permitting and duplicative regulatory requirements.
• This directive, which essentially instructs the head of the Department of the Interior to take a pro-resource development stance, could be a turning point if it gains traction. Environmental agencies have largely dismissed mineral development as having no economic or social benefits. A positive legislative directive would be beneficial to U.S.-based mineral development projects being held hostage by permitting.
• Gold could reach $2,000 per ounce later this year amid a “panic spike,” according to Clifford Bennett, chief economist at Empire Economics. Bennett cited rising investment demand around the world for the yellow metal as a key reason for his bullish outlook, predicting that “India and China will continue to stockpile gold.”

Threats

• Rising resource rent taxes continue to garner headlines in developed or emerging markets. Imposing windfall profit taxes or taxes that inhibit the creation of capital are some of the least stable forms of income upon which government can base spending plans.
• The Association of Mining & Exploration Companies (AMEC) in Australia claimed the government’s planned Minerals Resource Rent Tax would provide an uneven playing field for Australia’s smaller miners. This means that a small emerging miner will be paying an extra 6 percent in tax, compared to a large miner that will be paying an extra 2 percent. "This differential is a significant issue in respect of competitive neutrality, and puts the small emerging miners at a significant financial disadvantage," AMEC chief executive Simon Bennison said.
• Namibia plans to raise its mining tax to 44 percent from 37.5 percent as well as adding amendments to various tax laws and new tax legislation. These actions are due to Namibia facing volatility in its key revenue sources and looking to strengthen revenue collection.