Gold Market Radar (January 30, 2012)
For the week, spot gold closed at $1,739.07 up $72.42 per ounce, or 4.4 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, jumped 9.3 percent. The U.S. Trade-Weighted Dollar Index slid 1.7 percent for the week.
Strengths
- The week started with a takeover announcement that Pan American Silver was going to acquire Minefinders for $1.5 billion (Canadian), representing a 36 percent premium. Then with the Federal Reserve reporting that it would be maintaining low interest rates until at least the end of 2014, interest commodity markets surged with silver, gold and copper coming back into focus. The previous week, generalist investors had opined that they saw no reason to own gold. Gold soared to $1,713 the day of the Fed’s announcement, up 3 percent. Since the start of 2012, silver has climbed 22 percent and gold has risen 11 percent. After falling last year for the first time since 2008, copper has enjoyed its best start since 1987, up 13 percent for the year.
- Gran Colombia Gold Corp. rose 20 percent this week upon announcing positive drill results from its Segovia Property, confirming a strike length of 3,500 meters. This is the company’s second positive news release of drill results in 2012. The latest press release announced that the company had completed a diamond drilling program consisting of 86 diamond holes as of December 5, 2011. Bonanza grades were intersected with highlights being grades of 161 grams per ton gold and greater than 100 grams per ton of silver over 0.4 meters on the Provindencia Vein and 249 grams per ton of gold with 162 grams per ton of silver on the Silencio Sur Vein, part of the Las Aves vein system.
- Caterpillar reported its fourth quarter and 2011 results, delivering record-breaking sales and revenues for the year, with profits of just under $5 billion, up 83 percent from the previous year. Caterpillar benefits from the rise in infrastructure spending from its sales of earth-moving equipment for mining fleets. Major Drilling Group International and Energold Drilling are two other companies that provide drilling equipment to the miners, so their stocks also have been a defensive way to benefit from the increases in exploration spending.
Weaknesses
- There were a significant amount of negative headlines this week on South Africa’s attractiveness for mining investments. In 2006, the country was ranked 37th out of 64 countries and territories. The latest South Africa Survey shows the country’s position has declined to 67th out of 79.
- Factors contributing to the weaker rankings for South Africa would be the uncertainty concerning the administration, interpretation, and enforcement of existing regulations. Concerns over labor regulations, employment agreements, work disruptions, the reliability of the legal system, and uncertainty over disputed land claims are also considered strong deterrents for mining investment in South Africa.
- In addition, the country has experienced rolling blackouts due to a shortage of electricity generation capacity.
Opportunities
- John Embry from Sprott Asset Management said that he maintains his bullish view for gold on MineWeb’s weekly gold podcast this week. Embry said, "If the economies are as damaged as I think they are, particularly in Europe, (I don't think they are as good in China or the U.S. as they are trying to crack them up to be).... I think gold and silver prices could conceivably see the biggest percentage gains this year that they've had in the entire bull market.”
- On Tuesday, Eric Sprott also told an investor conference that everyone should make room for the shiny metal in their portfolios. "It is way less risky to have money in gold than to have money in the bank," Sprott told the GAIM USA conference in Boca Raton. "As an individual, I would have at least 20 percent in gold," Sprott said. "As a rule of thumb, high-risk portfolios should have about 10 percent in gold."
- There are a number of factors contributing to silver’s outperformance of gold so far this year. From a technical standpoint, silver appears strong after the breaking above the 50-day moving average and is likely encouraging investors to jump in. Additionally, a breakdown in the gold-to-silver ratio has triggered silver buying. Retail demand for silver coins has also been very strong, particularly in the U.S. So far in January, sales of American Eagle silver coins sit at 5.3 million ounces, the strongest volume since January 2011.
Threats
- The Herald, a Zimbabwean newspaper, reported on Wednesday that the government will soon announce raised mining license fees, with a focus on the growing platinum and diamond sectors. Finance Minister Tendai Biti said he expects $600 million cash inflows from the diamond sector to help fund a $4 billion budget for 2012. Mining expectations are obviously very high in Zimbabwe.
- Mali announced a proposed revision to its mining law that the country is seeking to raise the government’s share in mining projects from 20 to 25 percent. However, the revision would also trim taxes on mining income to 25 percent from 35 percent and it is yet to be passed by parliament. Mali relies on gold for about 70 percent of export revenues and 15 percent of gross domestic product, with the country’s gold revenues surging in 2011 by more than 20 percent tracking a rise in gold prices. While this falls under the heading of countries wanting a bigger share of gold mining exposure, Mali’s decision to also lower taxes in exchange was a welcome compromise.
- With Barrick Gold and Newmont Mining giving unimpressive 2012 production guidance, it’s apparent these senior gold mining companies must confront the growth versus profitability dilemma. Historically, to achieve significant growth the larger companies have sacrificed capital discipline by acquiring large, low-grade gold deposits with high investment risks. As the gold price has gone higher, so have these capital costs.
