Gold Market Radar (February 20, 2012)
For the week, spot gold closed at $1,723.38 up $1.38 per ounce, or 0.08 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, edged 0.52 percent lower. The U.S. Trade-Weighted Dollar Index creped higher by just 0.41 percent for the week.
Strengths
- According to the World Gold Council, demand for gold hit 14-year highs last year. This was driven by record investment, increased buying in China, and central bank purchases which were at their highest level in 40 years. Global gold demand reached 4,067.1 tons last year, the highest level since 1997. This is largely attributable to a 5 percent increase in investment demand.
- The world’s first yuan-denominated gold exchange traded fund (ETF) made its debut on the Hong Kong stock exchange this week. Analysts believe that the product will be successful as more investors become familiar with holding gold through an exchange-listed product. The Hang Seng RMB Gold ETF was launched by the Hang Seng Bank Ltd and is intended to track the performance of the London gold fixing price in U.S. dollars.
- The State Bank of India, the country’s largest commercial bank, is now offering rail employees special discounts on gold coins with their salary packages. With 1.44 million employees, Indian Railways is the world’s second-largest employer behind the China National Petroleum Corporation.
Weaknesses
- While some senior mining companies have posted weak results, dividends continue to be a focal point for gold miners. Most recently, Agnico-Eagle and Kinross announced dividend increases of 25 percent and 33 percent, respectively.
- The dividend hikes are a strategy gold miners are using to attract investors to the mining sector. Dividends have historically been a significant component of mining shares, but this trusted method of building shareholder wealth had mostly been forgotten in recent years.
- With new accounting standards going into effect in 2012, a number of companies have had to write down the book value of several acquisitions as part of their latest earnings results. These non-cash charges could possibly make some companies think twice about future deals, but an assessment of a few recently disclosed resource statements reveals that some companies may need to acquire higher grade assets to shore up their valuations.
- The British Columbia Securities Commission forced Extorre Gold Mines to withdraw its prospectus filing and cancel its recent bought deal financing due to a technical issue with a preliminary filing back in August 2011. This is a puzzling development since these reports are called “preliminary” for a reason and should not be viewed as “definitive economic reports” by the market.
Opportunities
- Singapore announced that it will exempt gold and other precious metals from its 7 percent goods and services tax as a measure to spur the development of gold trading in the country. This measure brings its tax treatment in line with countries such as Switzerland and Australia, and should encourage asset managers to seriously consider relocating their operations within the investment-friendly country.
- Gold mining in Colombia is predicted to attract $2.1 billion in gold-related investments by 2015, as major gold players have recently announced ambitious plans in the country. AngloGold Ashanti said that it will be investing $400 million in the coming months and Gran Colombia Gold also announced that it would exceed its 2011 investments of nearly $20 million.
- Despite controversy surrounding Newmont Mining’s stalled $4.8 billion Conga project, it is clear that the project will continue; it is just a matter of when. Peru’s Council of Ministers has hired two Spanish engineers and a Portuguese geologist to “overhaul” the environmental impact study for the project. Oscar Valdes, the country’s prime minister, said recently that the problem with the project is not actually a lack of water, but a lack of infrastructure, such as dams and pipelines, necessary to give residents access to the water.
Threats
- The recent death of a prominent mining advisor in the Democratic Republic of Congo may trigger a power struggle in one of Africa’s biggest mineral-producing countries. Augustin Katumba Mwanke, the former governor of the copper-rich province of Katanga, was among five who died this week when a jet crashed at an airport outside the eastern city of Bukavu. Analysts are speculating that because Katumba was regarded as the “power being the throne” and was instrumental in negotiating large contracts for the country. Without him, there will be a great deal of uncertainty about who will ensure the contracts remain intact.
- As we approach elections in Zimbabwe, concerns we’ll see a similar crackdown to the one that preceded elections in 2008 have been heightened after President Robert Mugabe’s party suspended 29 non-governmental organizations (NGOs). Mugabe’s banishment of foreign NGOs make it difficult to provide humanitarian assistance or monitor the vote. It’s widely suspected that Mugabe and top figures of his ZANU-PF party have abused human rights and rigged past votes.
- A Barclays study showed that the Fed has purchased 91 percent of 20- to 30-year Treasuries since beginning its Operation Twist program last year. With the disguised money printing strategy set to end in June, one has to wonder what amount of yield will be needed to attract interest when the Fed is no longer a buyer.
