Gold Market Cheat Sheet (November 7, 2011)

Gold Market Cheat Sheet (November 7, 2011)

For the week, spot gold closed at $1,754.65, up $10.90 per ounce, or 0.63 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, rose 1.40 percent. The U.S. Trade-Weighted Dollar Index surged 2.46 percent for the week.

Strengths

• Both gold and the gold stocks tacked on more gains this week despite a surge in value of the U.S. dollar.  The strength in the dollar was not fundamentally driven but came in response to Japan’s policy of currency manipulation to weaken the yen and thus boost the earnings of its companies which are heavily dependent upon export markets.
• A number of companies recorded strong weekly performance driven by quarterly updates on earnings.  Dundee Precious Metals, Inc. rose 9.5 percent, Royal Gold gained 9.3 percent, and Yamana Gold moved 4.6 percent higher.  In addition, Lake Shore Gold Corp. jumped 11.8 percent on high volume and Agnico-Eagle Mines bounced back 3.8 percent on an upgrade to buy from Dalman Rose & Co.
• Ongoing M&A activity continues in the mining industry, with Anglo American announcing its plan to pay $5.1 billion for Oppenheimer’s 40 percent stake in De Beers, increasing the company’s stake to 85 percent in the diamond producer.  This also ends the family’s links to the diamond business almost after a century.  De Beers recorded a 55 percent increase in first-half earnings attributable to record sales in a price increase, driven by China, India and the U.S., which maintains the record for being the world’s largest consumer of diamond jewelry.  Anglo American has been working on the acquisition “for years,” after being the company’s largest shareholder since De Beers became a private company in 2001.  De Beers is tied for the title of the world’s largest diamond producer with Russia’s Alrosa.

Weaknesses

• Alamos Gold fell 11.5 percent on updated earnings which fell 73 percent to $5.4 million, dented by a tax charge related to a weaker Mexican peso, a delayed timeline for development of its properties in Turkey and a shortage of cyanide during the quarter.  Overall, the senior North American gold stock outpaced the junior tiered gold stocks by about 250 basis points which tended to dampen our performance for the week.
• ETF redemptions have picked up recently with investors reducing their holdings in silver ETFs by 320 tons in October.  They now hold 14,182 tons which is down from the peak of 15,633 tons in mid-April.  This 9.3 percent reduction in holdings coincides with a 3.8 percent drop in the gold ETF position.
• The U.S. Department of Justice has been asked to investigate Freeport McMoRan and whether or not the company has violated the Foreign Corrupt Practices Act through alleged bribery of Indonesian security forces.  Currently, Freeport McMoRan continues to be involved in an ongoing strike with Indonesian union workers at the Grasberg operations, one of the world’s largest copper and gold mines.

Opportunities

• The Royal Canadian Mint announced the IPO of Exchange Traded Receipts (ETR) under the Mint’s new Canadian Reserves program, taking the gold ETFs head on.  The new ETR is aimed at eliminating the middleman in direct gold ownership; the owner of the ETR will own the actual gold rather than a unit or share in an entity that owns the gold.  ETR holders will be able to redeem their ETRs for physical gold products in the form of 99.99 percent pure gold bars or coins, or for cash based on the future gold price or market price of the ETRs.  Not to be outdone, Australia unveiled the world’s largest gold coin, weighing 1000 kilograms, or one ton, to mark the visit of Queen Elizabeth II.  The coin is 99.9 percent pure and has a nominal value of $1 million, but the gold itself is worth over $50 million Australian.  Previous to this coin, the Royal Canadian Mint held the record for the largest coin.
• This week central bankers in Europe, the U.S., Canada and Australia all emphasized the potential for further downside risk to the economy given the current uncertainty in economic growth.   Don Coxe highlighted in a recent call that investors will continue to seek safety in gold, where it is increasingly viewed as reliable source of value, as economic concerns persist.
• Rio Tinto’s Chairman Jan du Plessis remains confident about China’s economy and emphasized that despite the country’s economic growth visibly slowing; it would remain fairly resilient to a correction, albeit a sharp one, in developed economies.  Du Plessis went on to say to an audience of business leaders in Sydney that despite signs of a slowdown and softening demand for industrial commodities, domestic demand remains strong.

Threats

• Community and political issues afflicting mining projects have been making headlines more often in recent months.  One of the latest news to hit headlines was Newmont Mining Corp. having to halt its Peru mine works on fears of protestor invasion.  Local community and political leaders worry that Newmont’s project, which would be the biggest investment in the history of Peruvian mining, would cause pollution and sap water supplies used by farmers.  Although protestors are urging the government to issue a decree that would ban the $4.8 billion gold project, this seems unlikely as the new gold mine is projected to generate hundreds of millions of dollars in taxes and royalties to the central government.
• Although Susan Shabangu, South Africa’s Mineral Resources Minister, is traveling to Australia and Britain with the goal of soothing investors’ worries of nationalization within the country, other constraints are affecting investors’ feelings towards South African mining investment.  In addition to fears of nationalization, soaring electricity and labor costs, power shortages and rail and port restrictions are still weighing on the industry.
• Speculation around Australia’s 30 percent mining profits tax is said to hurt the junior minors.  Andrew Forrest, founder of Fortescue Metals Group, says that the tax will force junior miners to shoulder the tax burden while global miners pay nothing. Australia’s small and mid-tier miners made a plea to the government and presented modeling claiming the planned tax would see small and mid-tier miners pay an effective tax rate of 46 percent, while BHP Billiton and Rio Tinto would pay no tax due to the large deductions they are able to claim.