Gold Market Radar (December 12, 2011)
For the week, spot gold closed at $1,711.60 down $35.15 per ounce, or 2.01 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, fell 1.00 percent. The U.S. Trade-Weighted Dollar Index was essentially unchanged for the week.
Strengths
- A study commissioned by the World Gold Council from New Frontier Advisors reconfirmed goldâs role as an excellent portfolio diversifier. The study suggested that the optimal strategic asset allocation for investors with the lowest risk portfolios is to hold 2-3 percent in bullion, for portfolios with a 50/50 split between equities and bonds to hold 4-9 percent, and for equity-focused portfolios to hold as much as 10 percent. The conclusions further support the case for gold as a foundation asset which could provide safety against extreme events.
- Maintaining the rising dividend trend among gold companies, both Goldcorp and IAMGold announced increases in their dividends this week by 32 and 25 percent, respectively. Income streams on gold stocks are becoming increasingly important.
- Randgold climbed 4 percent this week while the Gold Bugs Index fell 1 percent. SmarTrends identified Randgold as having the lowest beta in the gold industry. Lower beta stocks are generally considered to be less risky and offer more stable returns, according to SmarTrends. Randgold is expected to grow its gold production by 60 percent in 2011 and the site of its next development project, the Democratic Republic of Congo, had presidential elections this week which were not disruptive to the future of the country.
Weaknesses
- This week was volatile, playing off investorsâ emotional roller coaster in anticipation of news coming out of the eurozone regarding the ever-impending global sovereign debt crisis. In an effort to shore up liquidity, European banks sought new ways to gain access to dollars by lending their gold to the market. This drove lease rates on gold to their lowest level on record this week.
- Kinross Gold reached a nonbinding agreement with the Ecuadorian government over its Fruta del Norte deposit, however, analysis of the terms and conditions shows how strongly resource nationalism has influenced the terms of the agreement. Among the many conditions agreed upon, the government must get a minimum 52 percent of the economic benefits of the project and there is a clause outlining a 70 percent windfall profit tax on the excess of the realized gold price above certain thresholds. In addition, there is mention of advanced royalty payments on the mine before it is even in production.
- David Rosenberg noted that the generation on the brink of retirement has an extremely low percentage of their retirement assets in fixed income investments. For those who were betting on elevated portfolio returns from the equity market to deliver adequate retirements savings, time has run out. He recommends an investment strategy focused on safety and income at a reasonable price and suggests precious metals and energy-based investments that carry a yield.
Opportunities
- Rye Patch Gold seized a âgoldenâ opportunity by taking advantage of Coeur dâAlene Minesâ failure to pay federal claim maintenance fees covering its Rochester silver-gold property in Nevada, by taking control of the land. The land represents 20 percent of Coeurâs Rochester reserves, with total proven and probable reserves around 27.6 million ounces of silver and 247,000 ounces of gold. Rye Patchâs shares price soared 82 percent for the week. The World Precious Minerals Fund is the fourth largest investor in the company holding 3 percent of the companyâs shares.
- According to Ernst and Young (E&Y), there is a light at the end of the tunnel for junior miners, who have been underperforming since the beginning of the year and are at similar valuation levels of 2008. E&Y noted senior mining companies are more likely to tap the debt markets for funding as they are sporting underleveraged balance sheet. Lee Downham, of E&Y, commented, âthe upside for juniors is that there should be less competition for equity as large producers simply donât need it in absence of major M&A.â
- Japanese Finance Minister Jun Azumi will be rewarding investors who buy reconstruction bonds with half an ounce of gold, an added incentive that could boost the return by nearly six times. Individual investors who purchase more than $129,000 in the debt with a 0.05 percent yield and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), worth about $948 based on current prices for the precious metal. This is interesting development of offering a fixed amount of gold as a sweetener to increase public appetite to buy government debt.
Threats
- This week, the UN Security Council toughened sanctions against Eritrea after it was accused of providing support to Islamist militants to their East African neighbors. The resolution requires foreign companies involved in the countryâs mining industry to ensure that funds from the sector are not used inappropriately. So far, early drafts of the resolution included measures such as banning foreign investment in Eritreaâs mining sector and blocking a remittance tax imposed on nationals overseas. This could be a headwind in the future to foreign-owned mining companies with the country.
- TD reported that gold shipments from Japan, the worldâs third-largest economy, are at the highest level since at least 1985, as individuals who purchased jewelry more than 20 years ago, are now selling it amid record prices. Japanese gold exports have predominantly been increasing to Southeast Asia and China. Countries with negative real interest rates are becoming significant purchases of gold, such as China, where inflation is eroding the value of bank deposits.
