Gold Market Radar (December 19, 2011)
For the week, spot gold closed at $1,598.95 down $112.65 per ounce, or 6.58 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, fell 9.06 percent. The U.S. Trade-Weighted Dollar Index jumped 2.07 percent for the week.
Strengths
- Despite tough gold markets, we continue to see strength from Asia, with the latest government statistics showing that Chinese gold imports were up 50 percent in October from September. The most common route for Chinese imports is one through Hong Kong, which hit a new record and was 40 times higher than imports via this route a year ago. This is the fourth month of record imports into China. Chinese New Year, beginning January 23, presents a strong platform for further Chinese gold import records.
- Peru’s newest Prime Minister Oscar Valdes decided late Thursday to lift the “state of emergency” instituted late last week in response to protests that had turned violent against the Newmont and Buenaventura Minas’ Conga project. Negotiations will be reopened Monday. Both Buenaventura and Rio Alto Mining, with largely only Peruvian based assets, rose 4.5 and 2.9 percent, respectively.
- Despite the pull back in gold bullion, gold exchange-traded products have experienced fairly small outflows so far, and do not anticipate much to change. With the amount of gold held equaling the holdings of the French central bank, the amount of gold is up nearly 20 percent for the year. The recent price correction touched almost a 17 percent drop from the highs set in September 2011 and by the end of the week gold seemed to have found a floor.
Weaknesses
- Gold was likely a source of liquidity to meet redemptions for hedge funds that anticipate large redemptions due to poor equity market performance and suffered somewhat from European banks, such as France’s Credit Agricole decision to scale back its commodity trading and finance business in a move to cut risk. As proprietary trading for the banks was ended by new regulations, many of the trading desks have been scuttled in Europe.
- With gold taking a hit this week, the reins were also pulled in on gold stocks. Senior gold stocks declined roughly 9 percent but junior gold producers decreased, on average, about 6 percent, perhaps reflecting cheaper valuations. Gold exploration and development companies fared the worst, with a fall of about 11 percent.
- The decision to rule Rio Tinto as the winner in the arbitration with Ivanhoe Mines left Ivanhoe’s shares down almost 22 percent this past Tuesday. Rio Tinto is no longer subject to a standstill agreement with the company which therefore means that Rio is protected against having its 49 percent holdings diluted should Ivanhoe issue additional shares. When questioned whether or not Rio would continue taking Ivanhoe out completely, Rio stated that it, “may seek opportunities to increase its shareholding in Ivanhoe to a majority position but currently has no intention of making a full takeover bid for Ivanhoe’s shares.”
Opportunities
- Due to the Royal Canadian Mint’s (RCM) overwhelming success of its new Canadian Gold Reserves’ Exchange Traded Receipts (ETRs), the RCM is now considering marketing silver ETRs. With each ETR representing actual ownership in the physical precious metal, investors helped to raise C$600 million in three weeks for the gold ETR initial public offering, killing initial expectations of raising C$250 million. So far, U.S. customers are the largest buyers of the gold ETR.
- Merger and acquisition activity remains hot in the gold space with the latest bid coming from Luxor Capital Group, a major hedge fund, for Crocodile Gold. Luxor said it would buy up to 215.5 million Crocodile Gold shares for C$0.56 a share, representing a 60 percent premium over the previous day’s close. Currently, Luxor owns 10 percent. Crocodile Gold shares were up almost 39 percent the day of this announcement.
- India reportedly has been considering freeing gold doré imports, which up until this point, has only been undertaken by India’s central bank. India’s commerce ministry is currently debating a proposal which would ultimately bring down jewelry prices. The country’s Finance Bill 2011 had stipulated that doré, with up to 80 percent gold content, could be imported through designated agencies, under strict conditions and a complex tax structure; freeing the import restrictions would encourage more to come into the country. The Centre for Monitoring Indian Economy has forecasted that the country’s consumption of the precious metal will surge 50 percent to 1,200 tons a year by 2020.
Threats
- Oxford Policy Management reported in a new research document that Botswana, the Democratic Republic of Congo and Zambia are currently most vulnerable to “resource curse.” The study looked at nearly 100 “mineral-dependent” countries and explained “the paradoxical situation in which resource-rich countries suffer from stagnant growth or even economic contraction, as well as institutional problems such as corruption and weak public service delivery.” Other countries in this category included Bolivia, Burkina Faso, Ghana, Guyana and Mauritania, where many companies are currently mining.
- The FTSE International announced this week that it had increased the free-float requirement for U.K. incorporated companies seeking inclusion in the benchmark U.K. equity indices to 25 percent from 15 percent, subject to take effect January 2012. Although this announcement is potentially positive from a liquidity and corporate standpoint, it does potentially threaten the stocks until compliance is met. Eurasian Natural Resources, Fresnillo and ENRC are a few companies that may have trouble meeting this new requirement.
- Absa Capital’s latest quarterly economic outlook reported that mining and manufacturing would remain a drag on South Africa’s growth for 2012. Gina Schoeman, a leading South African economist, pointed out that the two sectors had been a material drag on the country’s growth performance during the second and third quarters of 2011. Growth domestic product was negatively affected in the third quarter by a 17.4 percent quarter-over-quarter contraction in mining, while an 8.8 percent contraction in manufacturing in the second quarter affected the second-quarter GDP number.
