Gold Market Cheat Sheet (August 22, 2011)
For the week, spot gold closed at $1,852.10, up $105.20 per ounce, or 6.0 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 1.88 percent. The U.S. Trade-Weighted Dollar Index fell 0.84 percent for the week.
Strengths
- Gold had another strong week, reaching an all-time high of $1,867.95 an ounce on Thursday with renewed concerns over the European debt crisis. Gold is continuing to find favor among investors for mitigation against falling asset prices. With gold being one of the few assets that is uncorrelated with market returns, it has played a vital role in portfolio diversification.
- The World Gold Council (WGC) published their latest results. The WGC highlighted that strong demand in India and China, coupled with an overall drop in recycling activity this quarter, demonstrates that these regions have adjusted to the current price environment and expect the upward price trend to continue.
- As prices of gold are reaching all-time highs, silver has also experienced a big rise, particularly in the Middle and Far East, as we see a strong trend towards silver purchases as an investment with a number of precious metals dealers reporting much higher demand for silver than for gold at current price levels.
Weaknesses
- Overall, senior and mid-tier gold miners faired about the same in term of relative performance with a gain of roughly 3.4 percent, however the TSX Venture Exchange fell almost 3 percent, putting pressure on the junior mining sector. RBC gold analyst team reported earlier in the week that there is very little appetite for riskier mining assets, including, early stage exploration companies, miners in Africa or Southeast Asia and/or companies with single mine assets outside of North America.
- TD Securities Bark Melek warned investors that “gold is set to continue its short-term correction after its stellar performance.” Investors are questioning how high the price of gold really can go before a mean reversion materializes.
- The WGC noted that overall gold demand fell 17 percent in the second quarter relative to same quarter in 2010 mainly due to a slow down in investment demand in the private sector. Interestingly, Central Banks’ purchases more than quadrupled for this same period.
Opportunities
- With the rise in bullion this week it was a relief to see the majority of the gold stocks buck the down trend in the general equity prices. The huge spread that has developed this year between the performance of gold bullion versus the returns of gold stocks has been a major disappoint for gold equity investors. As we saw the CME raise margin requirements for bullion, the continued run in gold might trigger more margin hikes or simply prompt investors to slow down on gold and buy the undervalued equities.
- Venezuela's President Chavez plans to repatriate the country's gold reserves held overseas. Traders noted this represents one of the largest moves of physical gold in decades. Venezuela noted the move was part of a strategy to shift assets away from European and American custodial institutions to ensure their safety.
- Contrary to silver’s “devil metal” reputation for being extremely volatile, in the past several weeks, while gold has seen some wild fluctuation up to above $1,800 and back down again, silver has hardly moved, staying firmly in the $38-39 range. Silver has been one of the least volatile investments during this period, and has lagged gold lately.
Threats
- A Grant Thornton International report warned that government intervention threatens global mining. The three key intervention areas identified by Grant Thornton include taxation, nationalization/indigenization, and environment. The report asserts that these interventions are motivated by financial and political pressure.
- It was confirmed Wednesday that Namibia has withdrawn a proposal to increase the tax on non-diamond miners to 44 percent from 37.5 percent and instead will propose a windfall tax when international prices are high. Namibia is one of 25 countries globally that was considering increasing its take of the mining industry’s profits.
- Papua New Guinea shocked the resource world by proposing to hand over mineral rights to the local landowners. While this may be extremely disruptive in the short-term, this would create a tremendous amount of wealth, free of unencumbered political issues. From an earlier study by Jude Wanniski, author of “The Way the World Works,” he noted that roughly 90 percent of all the oil and gas wells ever drilled were done in Canada and U.S. because land-based mineral rights are held in the private sector, not by government.
