Gold Market Radar (December 4, 2011)

Gold Market Radar (December 4, 2011)

For the week, spot gold closed at $1,746.75 up $63.22 per ounce, or 3.76 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, gained 6.51 percent. The U.S. Trade-Weighted Dollar Index fell 1.33 percent for the week.

Strengths

• Gold and gold stocks got a big lift this week as the Federal Reserve announced a coordinated policy change with five other central banks to lower the borrowing cost between the central banks and establish additional bilateral swap lines between the banks so that liquidity can be provided in each jurisdiction, in any of the currencies, if necessary.
• This step is seen as a prelude to having the support systems in place for European banks to implement some decisive actions in the coming weeks with regard to their debt crises. UBS speculated that markets may conclude Eurobonds may be the likely endgame and this would mean printing lots of money to buy bonds. Gold would be the main beneficiary of such a policy action.
• Meanwhile, gold purchases in China jumped sixfold year-over-year, helped by numbers reaching a high for the month of September at 56.9 tonnes. Just in the most recent quarter, China imported 140 tonnes in sharp contrast to the 120 tonnes in total taken in during 2010. The Chinese government has been actively promoting gold and silver purchases to its citizens via state-owned media outlets.

Weaknesses

• Newmont Mining halted its $4.8 billion Conga mine work this week citing safety reasons for employees and the local community. At least 30 people were injured when police fired rubber bullets, tear gas and at least two live rounds at protestors opposed to the gold project, when demonstrators started vandalizing the U.S. mine property.
• The Peruvian government has asked Newmont to temporarily halt its work to calm the violent protests and to restart talks with the local community. In a week when gold was quite strong, the news did not impact the stock too much as Newmont is one of the few U.S. based gold mining companies that has a captive audience of buyers based on restrictive investment policy statements that limit certain institutional investors to just this name.
• Randgold Resources trimmed its output guidance for 2011 from 740,000 to 760,000 ounces of gold to 690,000 and 700,000 due to setbacks at their Tongon mine in Ivory Coast. Wet weather and mining through transitional ore made for difficult mining conditions. Additionally, a work stoppage, a difficult changeover from diesel-generated power to the national grid, and a mechanical failure of the mill also contributed to the revised down output targets. The stock was down 6.2 percent on this news but rebounded 7.2 percent the following day. Investors snapped up the shares of Randgold on the pullback as it still has one of the strongest production growth profiles in the industry and average ore grades three times the average of its peers.

Opportunities

• SoGen released its much anticipated Mult Asset Portfolio Scenario/Strategy guide and its expects the Fed to announce in January 2012 it will keep interest rates at zero until employment falls below 7.5 percent or inflation moves above 3 percent on a sustained basis. This will be followed in March 2012 by another round of quantitative easing in the $600 billion range.
• SoGen’s ultimate conclusion is “Buy gold ahead of QE3 as money creation has a strong impact on prices.” Estimates are that gold could rise to $1,900 to close the gap with the monetary base due to QE1 and QE2. However, a gold price of $8,500 would be needed to close the gap with the expansion of the monetary base since 1920, as it did in the early 1980s.
• UBS noted that there is a large amount of potential energy in the gold market in response to the announcement of coordinated action by central banks. Until now, despite rising fears of the eurozone splitting and a contagion as a result, gold prices have been quite unresponsive. UBS has speculated that, "deleveraging and funding pressures are keeping investors fearful of a replay of 2008, when gold fell 31% between July and October, but was one of the first assets to rebound." Looking ahead to 2012, however, they believe that gold could be in for some "potentially explosive moves".

Threats

• At the Northwest Mining Association recently this week, Leigh Freeman, general manager and principal of Downing Teal, highlighted that, “we have a serious problem that we can put off no more.” Leigh reported that at least 50 percent of today's mining professionals in the U.S., Canada and Australia will retire over the next seven years, with not enough graduating to fill the vacant positions. Additionally, those who do graduate lack the leadership, innovation and critical thinking of the experienced baby boomers, which will also hurt mining's ability to meet global commodities needs.
• Richard Fisher, President of the Federal Reserve Bank of Dallas noted that U.S. risks “social unrest” if we don’t bring the federal debt under control. He pointed out our debt burden is larger than that of Europe and apparently we are still moving in the wrong direction.
• In the far north of Canada, Inuit in Nuanvut passed a resolution that will increase native royalties to 12 percent on April 1, 1013. They expect to take in nearly a half a billion dollars from the royalty in the first six years.