Gold Market Cheat Sheet (September 26, 2011)
For the week, spot gold closed at $1,656.80, down $188.08 per ounce, or 8.56 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 11.74 percent. The U.S. Trade-Weighted Dollar Index surged 2.19 percent for the week.
Strengths
- The week started on a strong note, as the World Precious Minerals Fund benefited from its exposure to the announcement that Agnico-Eagle entered into a definitive agreement to acquire Grayd Resources for C$275M in cash; a 41 percent premium to its prior close. Our fund is the second largest shareholder of Grayd Resources.
- While the senior-tiered mining companies have suggested there is no need to purchase assets from the junior exploration and development companies, our view is that there definitely are some transactions that would make sense.
- While gold fell 8.56 percent this week, and is nearly 13 percent off its recent highs, this type of correction is normal and to be expected. Since the start of the quarter, gold bullion had rallied more than 25 percent in the quarter due to investor concerns over the world wide debt crisis. Technically, if gold falls back to about $1,600 it would just be in line with its upward trend line established over the last five years. A correction to $1,550 would roughly be the next support level.
Weaknesses
- Friday’s five percent plunge in the spot gold price and 13 percent drop in silver apparently reflected the after-market close announcement by the CME that it would raise margin requirements for gold and silver futures by 21 percent and 15 percent, respectively.
- After the Fed noted on Wednesday, "There are significant downside risks to the economic outlook, including strains in global financial markets," investors were in liquidation mode for all assets classes, including commodities, and sought safety in U.S. dollars and U.S. Treasuries.
- Brought on by more fears of a further economic slowdown, HSBC commented that in normal circumstances this would be positive for gold. Instead, the equity declines have been so steep that investors have raised cash by liquidating bullion as risk managers called for profit-taking on gold, one of few assets classes to deliver significantly positive returns this year.
Opportunities
- One of the main talking points at the Denver Gold Forum, held this week in Colorado Springs, was the perception of how undervalued gold mining equities are relative to the price of gold. Tim Wood, the executive director at the Denver Gold Group, made note that the multiples of equity valuations have not kept pace with bullion. There was much discussion at the conference of whether the valuation levels are an indication that the market is expecting some sort of a pullback or whether there is something else going on. He noted that gold is “acting like a money now and that's what we need to take into consideration. We are already seeing that in many instances organizations, institutions are starting to accept gold as collateral. Now that hasn't happened for a very long time. So you can actually put down physical bullion as collateral and we can see gold's increase in price is really a reflection, not just of the turmoil that we are seeing around the world but it is taking on a very real monetary role because you've got this race to the bottom amongst all the currencies.”
- Miningweekly.com highlighted that Nouriel Roubini, a worldwide respected economist, announced to a South African audience that commodity markets were not yet fully pricing in the rising risk that a number of advanced industrial countries, including the U.S., could face a double-dip recession. He was calling for a two-thirds probability to the likelihood that some European economies and the U.S. would report economic contractions in the coming months and quarters. Consequently, commodity prices would experience renewed pressures. Gold, specifically, as a precious metal would likely “buck the trend” as investors seek safety against a possible new financial crisis.
- Ongoing global concerns over the sovereign debt crisis have led influential figures to predict higher prices for gold. Thomson Reuters and Eric Sprott have called for a push toward gold prices of $2,000 per ounce and $2,500 per ounce, respectively, should the debt woes continue. “If governments keep printing more money, the price can go anywhere. It could go to $10,000/oz, it could go to $20,000/oz,” Sprott opined.
Threats
- Short sellers are under threat this week as Silvercorp Metals filed a lawsuit in New York against a stock manipulation scheme. Plaintiffs named in the lawsuit could be hard pressed to make their case when subject to cross examination and the prospect of financial ruin.
- Financial Times published an article saying that regulators worldwide are now focusing on ETFs. The necessity of increased regulation recently came to light over the UBS rogue trader, who managed to accumulate $2.3 billion in losses for the company. Increased international supervision and limits are being considered to eliminate systemic risk connected with ETFs.
- In a highly publicized story, Donald Trump recently accepted bullion as a means of payment for property.
