Gold Market Radar (January 16, 2012)
Strengths
- Gold, which had been trading below the 200-day moving average, crossed above on Tuesday with momentum players joining the markets. For the week, gold closed just above the 200-day moving average at $1,639.30 an ounce. Palladium also had a strong move, up almost 3 percent for the week on warnings of power supply curtailments in South Africa which could effect mine production.
- China’s Ministry of Industry and Information Technology reports that China produced 32.61 tons of gold in November, a 2.7 percent increase from the previous month. Total output for the first 11 months of 2011 rose 4.85 percent. More importantly, the latest trade data shows China imported 102 tons of gold from Hong Kong in November, the most ever. In addition, gold coin sales in the U.S. surged to 85,500 ounces sold during the first 12 days of January, according to the U.S. Mint. At this pace of sales, January could be the highest level of gold coin purchases since December 2009.
- In the midst of earnings season, a number of companies reported very positive results. Yamana Gold forecasted a 13 percent increase in gold equivalent production for 2012 after producing a total of 1.1 million ounces in 2011. Goldcorp also forecasted a 70 percent increase to 4.2 million ounces of gold production in five years and 2012 gold production guidance of 2.6 millions ounces. This comes after the company met 2011 gold production guidance at 2.5 million ounces. Freeport McMoRan reported that workers who returned to their Grasberg mine in Indonesia continued to ramp up production. The strike had gone on for three months, tightening copper production. The stock was up nearly 8 percent for the week on this positive news.
Weaknesses
- With earnings being reported for a number of companies, investors took short-term profits where they could on Friday. This led gold and the NYSE Arca Gold Miners Index (GDM) down 0.68 and almost 1.3 percent, respectively, for the day. Although the gold rally was dented, it was not reversed. Senior gold equities were hit the hardest on Friday, down 1.14 percent for the day, while juniors were only down 0.21 percent. On a country-specific basis, South African gold stocks were hit the most as currency and electricity restrictions weighed on their performance. Junior gold exploration and development stocks outperformed senior gold equities on the whole for the week, with added strength seen in the senior silver names.
- Momentum in the gold market stalled on Friday with a bit of profit taking from short-term players. The Shanghai Gold Exchange also announced it would temporarily raise margin requirements on gold and silver ahead of the week-long Lunar New Year holiday.
- Hecla Mining's Lucky Friday mining project has turned out to be not-so-lucky. The company announced this week that it would be shutting down a silver shaft on the project due to maintenance and a safety review following a rock burst in late December. This mine accounts for 25 percent of its silver production. Accordingly, the company reduced its 2012 silver guidance by 2.5 million ounces to 7 million ounces. Hecla was down over 20 percent on the news.
Opportunities
- Asian demand for gold seems to be picking up again. While the Indian rupee has slightly strengthened, prices have remained stable, laying the groundwork for improved Indian demand for the metal. With the Chinese New Year holiday just around the corner on January 23, news reports show gold imports through Hong Kong are at record levels and the Chinese government is successfully managing its economy by taming inflation. This is reassurance that gold demand will continue to rise from the country.
- While central banks have been net purchasers of gold since 2009, pension and insurance funds only hold 0.3 percent of their assets in gold and mining shares. A commentary on Mineweb.com made the point that with continuing losses and growing pension deficits, these funds may be forced to hold gold because it is the only asset class negatively correlated to financial assets such as stocks and bonds. With over $200 trillion of global financial assets, this would represent a massive shift from the $2 trillion in gold bullion privately held today.
- Argentina is expecting the mining sector to continue to expand over the next six months as two Canadian miners, Pan American Silver and Goldcorp, plan to start construction on sizeable projects. Although it still lags behind regional heavyweights such as Chile and Peru, Argentina’s mining industry has been experiencing rapid growth since 2003.
Threats
- Research analysts expect gold mining to be socially challenged in 2012 as industry participants will need to demonstrate that the existing formal mining models in the host country, rather than the informal/illegal type of mining, are working and contributing to the country. A significant shortage of skilled labor and a necessity for companies to show that their activities are socially responsible and positively contributing to the local communities will also prevail.
- Members of the London Metal Exchange (LME) are pushing the LME to retract a new user trading fee that would boost the exchange’s revenues and encourage potential bidders. Brokers are concerned that it would hurt their way of doing business. Traditionally, the LME has kept trading fees low. Mineweb.com reported that industry sources say members were not consulted on the levy and some are rallying their peers to try and persuade the LME board to head off the move scheduled to take effect in March.
- Poland’s controversial mining tax has been approved by the committee that prepares government legislation and now only requires final clearance from the government and parliament. This new mining tax would be helping to raise 1.8 billion Polish zlotys for state coffers this year. KPGM Polska Miedz SA, the country’s most profitable company and sole copper producer, is now considering returning to the debt markets for the first time since 2003 should the government approve this new mining tax. The company will need to pay 1.8 billion zloty in new taxes this year.
