Gold Market Cheat Sheet (August 15, 2011)

Gold Market Cheat Sheet (August 15, 2011)

For the week, spot gold closed at $1,746.95, up $83.15 per ounce, or 5.0 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 5.4 percent. The U.S. Trade-Weighted Dollar Index was essentially unchanged for the week.

Strengths

• As reported on Mineweb, precious metals analyst David Morgan anticipates that silver could reach $65 to $75 an ounce. He attributes the main demand for silver coming from the East, where silver demand is growing for both industry and as an investment.
• Year-to-date, demand for silver in China and India is up 30 percent. Silver demand in China and India has increased sharply in recent years as more investors use silver as a store of value. About 70 percent of China’s silver demand comes from the industrial sectors. Albanian Minerals President and CEO Sahit Muja said, “Silver demand in China and India is set to rise 40 percent in 2012.”
• Reuters reported that gold available in exchange for cash has been drying up as prices are rising even higher. In Mexico City, it has been noted that fewer customers have been coming into the shops that buy bullion from local residents. The success of the cash-for-gold industry over the past three years has left fewer and fewer people with any “old gold.” For those who did cash out in 2008, they missed a three-year bullion boom in which prices doubled.

Weaknesses

• On Thursday, exchange operator CME Group raised margin requirements on gold futures by 22 percent, to $5,500 per contract from $4,500 per contract, which is the first time gold margins have been raised since November 15, 2010. Following this announcement, we saw gold settle to $1,764 per ounce.
• Rising margin requirements put a damper on gold prices on Friday, too, with prices slipping another $17.
• Overall, the gold stocks held up pretty well with the pullback in bullion prices.

Opportunities

• Eric Sprott believes gold has been the metal of the past decade, while silver is the metal of the decade to come. He says there is a large imbalance between demand and supply and that the metal is set for a major re-rating which will, in turn, bring the gold-to-silver ratio down to much lower levels.
• BlackRock’s investment strategist, James Holt, has said that the group will use profits from gold and bond investments to shop for bargains among the falling global equity markets. He stated that the firm will be seeking to put its resources into asset classes that are getting cheaper and cheaper, namely equities. BlackRock, one of the world’s largest money managers, holds 5 percent of its $83 billion global allocation fund in gold equities and gold exchange traded funds (ETFs). This could have a substantial positive effect on the gold equity market.
• Goldman Sachs and JP Morgan raised their gold price forecasts for the year, expecting the commodity to continue its surge as the sovereign debt issues in the U.S. and Europe intensify. JP Morgan now expects spot gold to soar to $2,500 an ounce by year end.
• Investors have been flocking to seek refuge in bullion amid economic concerns triggered by a downgrade of the U.S. debt.

Threats

• The last time we saw increased margin requirements for silver, just over three months ago, we saw silver fall from close to $50 an ounce back to below $34. Depending on market response, this scenario could be a possibility for gold as well, although there was much more leverage in the silver space compared to gold.
• The Ecuadorian President Rafael Correa has said that his government is demanding that mineral companies pay an 8 percent in mining royalties before “starting to extract the mineral.” His main driver behind this new policy is to assure that mining operations are “environmentally friendly and socially responsible,” with residents of the cities, parishes and communities near mining projects being the primary beneficiaries. Royalties to the extent of 8 percent have never been seen before and can make a project potentially uneconomic.
• Resource nationalism is one of Ernst & Young’s main concerns in its list of top ten risks facing the mining sector. As many governments struggle with budget deficits, the continuing boom in commodity prices has made the mining and metals sector an easy target as a source for increased revenue.