Gold Market Cheat Sheet (October 3, 2011)
For the week, spot gold closed at $1,623.97, down $32.83 per ounce, or 1.98 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, fell 2.21 percent. The U.S. Trade-Weighted Dollar Index rose 0.33 percent for the week.
Strengths
- AngloGold’s chief executive announced this week that the company will be investing $250 million each year in Brazil through to 2016 to raise its Brazilian output of the precious metal by two thirds. Relative to its Latin American neighbors, Brazil has not targeted the mining sector as an “enhanced” revenue opportunity for the government.
- While gold mining in Australia is the country’s third-largest resource export, the minority-led government said that broadening the controversial profits-based tax on coal and iron ore miners was not going to be expanded to include the gold industry. The 30 percent tax on mining profits is estimated to generate $8.2 billion in its first two years from July 1, 2012, helping the budget return to surplus which is laden with unfunded government pension benefits. The tax legislation was designed to shift government liabilities to China via a resource tax on exports which are primarily heading to the Chinese market.
- Don Coxe, a global portfolio strategist, highlighted as his investment recommendations to maintain heavy weighting in precious metals, particularly through gold mining companies. He pointed out that gold mines are the cheapest relative to bullion that the market has ever seen.
Weaknesses
- Senior gold mining companies, while down about 2 percent for the week, outpaced the junior gold and silver mining companies which were down 5 percent. While we had one acquisition announced in the gold space last week, there was only one new acquisition proposed by the close of the this week by a Chinese company for a copper company in the Democratic Republic of Congo.
- Peruvian President Ollanta Humala signed into law higher mining taxes and royalties, while Cabinet Chief Salomon Lerner told a news conference that the Humala Administration has no plans to ask other industries to pay more taxes. Miners will now pay 1 to 12 percent royalties of operating profits, in addition to a windfall profits tax ranging from 2 to 8.4 percent of net profits, with the goal of increasing tax revenue during the mining boom years. Previous to this, miners were paying royalties between 1 and 3 percent. However, new labor actions this week in Peru may signal that unions are still not satisfied and we may have not seen the end of this hot issue yet.
- Mineweb reported that the Shanghai Gold Exchange will raise trading margins for gold and silver forward contracts from September 30 temporarily to prevent default risks, ahead of the week-long national holiday. Gold and forward-contract margins would be increased from 15 percent to 20 percent and from 18 percent to 22 percent, respectively. Daily upward and downward trade limits would be raised to 18 percent from 12 percent. Margin requirements would return to original levels on October 11 should there not be any breach on the upward or downward limits on the first day of trading on October 10.
Opportunities
- Jeff Nichols, Managing Director of American Precious Metals Advisors, has said that the “summer run-up in the gold price was too far too fast” but continues to feel that fundamentals still support much higher prices ahead. Nichols noted that from the September 6 all-time high of $1,923 per ounce, to the September 23 gold price of $1,628 per ounce, we have only seen a decline of 15 percent, which is well within normal corrections for the precious metal. He pointed out it is not unusual for gold prices to correct by 10, 15 or 20 percent after a run-up similar to what we have recently experienced.
- Gold traded down, touching the 150-day moving average on Thursday, and bouncing off that to close on Friday with an uptick. Gold now appears to be returning to the upward pattern that we have seen steadily over the past five years. In light of the fact that the European and U.S. debt problems are not going to be sorted out next Monday, gold should find renewed support at these levels.
- In addition, gold mining stocks have fallen back. European-based funds in the resource space are thought to be experiencing redemptions, which may be part of the issue, as junior-tiered mining companies have been pushed lower due to a distressed seller being in the market.
Threats
- Professor Dick Stacey of the School of Mining Engineering at the University of Wits in South Africa emphasized that there is a fall off in South African mining research. Twenty years ago, there were 600 to 800 people involved in full-time mining research in South Africa. “If there are 40, it’s a lot,” he said. He went on to say that despite an absolute demand for rock mechanics in mining, there is a major Western shortage. This is poised to further worsen as well.
- Roubini Global Economics published a piece questioning whether or not the Indian and Chinese festivals will provide support for the plummeting gold prices. Gold fell 16.7 percent between August 25 and September 26. The decline was attributed to profit-taking to cover losses in other asset classes, Chicago Merchant Exchange (CME) margin hikes, disappointment in the Fed’s Operation-Twist-like bond restructuring program and concern around further rounds of quantitative easing not materializing.
- Michael Sata was sworn in as President of Zambia in a tightly contested election. Mr. Sata has promised to re-introduce the windfall mining tax and to promote policies that will bring greater benefit to poor people. Currently mining in Zambia, Africa’s top producer of copper, contributes 11 percent of GDP and the country aims to double the contribution by 2015.
