Gold Market Radar (February 6, 2012)
For the week, spot gold closed at $1,726.25 down $12.82 per ounce, or 0.74 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 1.2 percent. The U.S. Trade-Weighted Dollar Index was essentially flat with a gain of just 0.1 percent for the week.
Strengths
- The Year of the Dragon Lunar New Year holiday in China set a new record for gold buying. Sales for the two top jewelry sellers reached about 600 million yuan ($95 million), a nearly 50 percent jump over the prior year. With many Chinese losing money in the stock and property markets last year, gold is emerging as one of the preferred investment choices.
- The China Gold Association reported that the country’s gold production for 2011 rose 5.9 percent in 2011 to 361 tonnes. Five years ago, China became the world’s largest producer of gold. Most analysts believe that all of this domestic production is bought by the government to add to its reserve base, which is underweight gold relative to the size of its economy and its exposure to the dollar.
- In addition, estimates for Chinese gold imports in 2011 are roughly 490 tonnes. The public has a large appetite for gold accumulation as a means to build wealth.
Weaknesses
- A recent study by South Africa’s ruling African Nation Congress (ANC) has rejected calls for mine nationalization, but has come out in support of higher taxes and royalties.
- The policy for nationalization lost political momentum after the prime instigator, Julius Malema of the ANC Youth League, was found guilty of sowing discord among the party.
- Talk of nationalization has kept investors wary of South Africa, with higher taxes and royalties still issues.
Opportunities
- Don Coxe, in his latest edition of Basis Points, urges gold investors to invest in gold equities at the expense of bullion ETFs as the Fed continues its policy of nonstop money at zero rates. Likewise, David Rosenberg, of Gluskin Sheff, notes the Fed policy of currency debasement means that, in his opinion, exposure to gold and gold mining stocks in a portfolio is an absolute necessity.
- In a recent issue of Market Musings & Data Deciphering, David Rosenberg highlighted the Fed policy of keeping interest rates low with the potential for more quantitative easing to come, coupled with the current back-door QE program in the eurozone as being very constructive for gold.
- Rosenberg suggested investors would be more highly rewarded if they bought gold mining stocks versus gold bullion. He also noted that, historically, gold mining equities tend to dramatically outperform bullion in the later stage of a gold bull market.
Threats
- The Fed policy of extending low interest rates is making life much more difficult for insurance companies and pension funds that manage long-term liabilities and for retirees seeking income from their investments. Corporations are keeping high cash balances, partly due to uncertainty over future tax policy. Perhaps some of the reserves will be needed to fund pension plan deficits, which rose more than 50 percent in 2011.
- Newmont Mining noted in its recent regulatory filing with the SEC that its Hope Bay project in the far north of Canada will be subject to impairment testing. Back in 2007 when gold prices were trading around $800, Newmont paid $1.5 billion for a 55 million ton resource that is estimated to contain 10.1 million ounces of gold. This works out to a resource grade of 5.69 grams per ton of gold. Today gold has doubled in price, but apparently there is some concern that the $900 million in estimated capital requirements to build the project may escalate beyond where the project’s returns would not be robust enough to take the risks.
- Equity issuance has been heavy recently. Detour Gold raised about $240 million in the prior week, while NovaGold raised as much as $333 million this week, diluting current shareholders by more than 10 percent. While the NovaGold financing represents only a small fraction of the additional $6.7 billion it will need, financing of this magnitude cumulatively takes some of the momentum out of the market.
