Gold Market Cheat Sheet (September 6, 2011)
For the week, spot gold closed at $1,882.80, up $54.93 per ounce, or 3.01 percent. The U.S. Trade-Weighted Dollar Index also rose 1.24 percent for the week.
Strengths
- Both gold and silver turned in a strong week of performance rising 3.01 percent and 5.61 percent, respectively.
- Gold and silver stocks followed the precious metal prices higher and were not held back by generally falling equity prices across the broader market.
- Precious metal investors appear to now recognize how far the mining companies’ valuations have lagged behind the price performance in bullion and are rotating more money into shares of the gold and silver producers.
Weaknesses
- Miners in Peru expressed relief that the government has decided to tax profits and not revenue.
- However, the magnitude of taxes being targeted for collection in Peru is based on how much money the government is budgeting to spend on social programs.
- In other words, when the desired spending levels are inflexible and not sensitive to economic test, taxes could again be raised to shore up the budget.
Opportunities
- AuRico Gold started the week off with a surprise bid for Northgate Minerals at a substantial premium.
- This renewed merger activity woke up investors to how attractive acquisition opportunities are right now relative to the price move in bullion we have seen this year.
- For the senior and mid-tier gold mining stocks there are few options to put two companies together and unlock significant value. However, some of the most accretive opportunities for growing the resource base of the mid-tier companies will be to acquire the junior exploration and development companies that have already identified assets of significant interest.
Threats
- According to CIBC, the cash tax per ounce of gold produced by the industry has increased 1,200 percent over the past six years.
- Many of these tax increases are based on the perception there are windfall profits being made in the mining industry and the government should rightly receive a bigger payoff.
- Gold prices still remain volatile and could be subjected to more margin hikes by the CME.
