Gold Market Radar (November 28, 2011)
For the week, spot gold closed at $1,680.18 down $38.72 per ounce, or 2.25 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, fell 4.08 percent lower. The U.S. Trade-Weighted Dollar Index rose 2.05 percent for the week.
Strengths
- Dundee Precious Metals Inc. announced that the Bulgarian Minister of Environment and Waters has signed a resolution approving the environmental impact statement for the company’s Krumovgrad Gold Project in Bulgaria. Currently, Kromovgrad is just under 1 million ounces with a gold grade of 4.4 gram per ton. For an open pit gold mine this project is very robust, considering other companies more typically run an open pit operation at 1 gram per ton. Dundee finished the week up close to 2 percent in a very tough market.
- Rob Pease, President and CEO of Sabina Gold & Silver, reported this week that Sabina “had more than doubled the resource on the Black River property in essentially two drilling campaigns.” The updated resource released after the close on Monday added almost 1 million indicated gold ounces to the project, bringing total indicated resources to just over 4 million gold ounces. The stock was up around 8 percent Tuesday on the news.
- India's gold holdings have surged to an all time high. In two years, the value of gold in the Indian government's reserves has grown by over $19,353 million. Gold’s appreciation in price has helped to increase India’s central bank purchase of 200 tons of gold for $6.7 billion from the International Monetary Fund in November 2009. The government keeps the precious metal as part of its reserves. Other countries are also putting their trust in gold as central bank gold buying reached an unprecedented rate of nearly 150 tons in the third quarter and they are not likely to flip their holdings for a short-term gain.
Weaknesses
- The proposed mineral resource rent tax (MRRT) tax for Australia's mining industry has been in the news quite a bit lately and it appears as though it is almost certain to become legislation. However, some budget projections seem to indicate that the measure could turn out to be a deficit tax system, as all the concessions granted and costs to implement will outweigh the revenues taken in.
- Conditions in Europe continue to deteriorate. Once government officials’ designated 50 percent haircuts on Greek debt would not be considered a default event, interest rates have moved even higher. This only makes refinancing government debt even more expensive as investors demand to be fairly compensated for higher default risks.
- The collapse of Dexia is putting further pressure on both France’s and Belgium’s credit ratings as neither country can afford the consequences of a bailout. In Greece and Italy, democratic governments have been replaced with appointed technocrats. The 10-year bond auction in Germany fell short of expectations with bids coming in for only 65 percent of the maximum sells target.
Opportunities
- Franco Nevada Corporation announced an equity offering to raise C$340 million. This comes at a time when junior mining asset valuations are depressed and could be a significant price catalyst depending on how the cash is deployed. Some possible options include a gold streaming agreement that could push a single project over the financing line, a portfolio of royalty agreements could be deployed into a handful of junior companies, or an oil and gas property basket could be purchased to create an immediate income stream for investors.
- AngloGold Ashanti Ltd., the third-largest producer of gold, cut its 10-year plans to extend the world’s deepest mine. The company cited that it is moving away from larger-scale South African projects to hasten returns and cut risk. This is part of larger trend to find less capital intensive projects in the mining industry. A multibillion dollar capital deployment faces a lot of uncertainty over the attractiveness of the project to deliver positive after tax returns on investment. Companies are beginning to realize that investors are not as concerned with increasing the number of ounces produced, but with the profitability of those ounces and their potential to generate income for investors
- With default there is opportunity, as J.P. Morgan has been said to buy a 4.7 percent stake in the London Metal Exchange from the defunct U.S. brokerage, MF Global. It has been speculated that this will make J.P. Morgan the exchange’s largest shareholder. The U.S. investment bank would pay 25 million pounds ($39.1 million) for a stake in the world's largest metal market, implying a total value of around 530 million pounds for the operator. CME Group, Inc. reported this week that its European over-the-counter gold launch is well on track. "We're on track for our European clearing house to be able to clear gold, just as we already offer that in the U.S. with our U.S. clearing house," Harriet Hunnable, CME managing director for metals, told Reuters. In June, CME said it aimed to expand its clearing service to over-the-counter base metals products in the United Kingdom, in a race for a market seen growing due to regulation. Both the J.P. Morgan transaction and CME’s expansion of reach signal a greater financial commitment to gold and metal trading, and bode well for a positive outlook for market structure.
Threats
- Despite the efforts of Olli Rehn, the EU’s top economic official, in selling the concept of a new bond issued by the collective 17 Euro nations named the “Stability Bond,” Germany has vetoed the idea for the moment.
- The bond would have required the EU countries involved to pledge part of their foreign exchange holdings or gold reserves as security, essentially delivering a gold-backed bond to the market. Germany obviously is not willing to trade its gold for other people’s debt but the wider risk is that a weaker hand could succumb to such liquidity pressures. This has been the continued near-term threat to the gold price as investors are unsure if there will be a distressed sell of gold in the near-term.
- According to Rajesh Exports Ltd., India’s gold imports may drop 15 percent in the fourth quarter as the rupee’s fall to a record drives up domestic prices. India runs neck and neck with China as the world’s largest consumers of gold.
