Gold Market Radar (March 19, 2012)

Gold Market Radar (March 19, 2012)

For the week, spot gold closed at $1,660.00 down $53.65 per ounce, or 3.1 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 6.3 percent. The U.S. Trade-Weighted Dollar Index slid 0.3 percent for the week.

Strengths

• Precious metals with an industrial use have so far fared the best this year. Platinum is up just under 20 percent and silver is up almost 17 percent while gold is up slightly over 6 percent. Slightly improving economic conditions have been the driver for the stronger performance of platinum and silver versus gold as of late.
• China’s Ministry of Industry and Information Technology noted in its most recent figures that China currently holds the title of the world’s number one gold miner since 2007. The country has continued its dominance in world gold production with output rising last year by 5.89 percent to 360.95 tons. Overall, world production of gold is not that different from where it was 10 years ago, despite the price gains made over the past decade that should have stimulated more production.
• Despite the volatile gold prices we have seen lately and perceived passing of the latest wave of potential financial collapse, there are still many supporting arguments as to why gold will continue to remain a vital cornerstone in a portfolio during these still highly uncertain times. Economic growth is still weak, sovereign debt is still unsustainable, particularly if interest rates go higher, and from emerging markets to China, many countries are engaged in diversifying out of dollars and into gold as a means to achieve more stable reserve holdings.

Weaknesses

• India increased the tax on gold imports for the second time this year after record purchases widened the current-account deficit. Gold imports have grown by almost 50 percent over the last three quarters in India. Starting April 1, the government will tax gold bars, coins and platinum at 4 percent, which is up 2 percent from the tax set in January. Silver will incur no change in tax. Gold for immediate delivery fell on this news.
• In an agreement that may set a precedent for other foreign-owned mining companies, Zimbabwe and Impala Platinum, the world’s second-largest platinum producer, announced the agreement transfer of a 51 percent stake in the company’s Zimplats project to black Zimbabwean investors, as required by the government. The joint statement said that the 51 percent stake would be split with 10 percent to the community, 10 percent to Zimplats employees, and 31 percent to the state’s National Indigenization and Economic Empowerment Fund.
• Unfortunately, we saw another agreement setting a precedent for confiscatory fiscal agreements between the Ecuadorian government and Ecuacorriente’s Mirador project with taxes, royalties and duties combined to encompass 52 percent of profits. Kinross has been in the public eye over contracts negotiations for its Fruta Del Norte project along with IAMGOLD for its Quimsacocha project.

Opportunities

• Singapore announced that it is planning to boost its share of global gold trade sevenfold after scrapping taxes on bullion, according to International Enterprise Singapore, the city state’s external trade agency. Currently, about 2 percent of world gold demand flows through Singapore, and the goal is to increase that to 10 to 15 percent over the next five to 10 years.
• Last year Venezuela requested the repatriation all of its gold assets in fear of international rulings which might have encumbered the gold due to nationalization steps taken place within the country. This week, an article highlighted that there is a concern among political leaders worldwide who are worried about the whereabouts of their gold, especially any holdings held in the U.S. because of the possibility of a confiscation of foreign gold reserves by their custodian, the U.S. government.
• As an example, this January, the Dutch government admitted than only 10 percent of its 612.5 tons of the tenth-largest official gold reserve is held in the Netherlands. When questioned, the Dutch Treasury replied that the gold is located in Ottawa, New York, London and Amsterdam. More alarmingly, almost 60 percent of Germany’s gold is stored outside of the country with the majority of it being held in the Federal Reserve Bank of New York. The author argued, “What would happen if Germany needed to access its gold holdings urgently?” It would not be a surprise to see more countries take control over the security of their gold stocks in the future and this will likely raise the profile of gold in the public’s eye.

Threats

• South Africa, which used to be the world’s biggest gold producer, continues to see its gold production plunge. Following an 8.2 percent drop in December, South Africa saw an 11.3 percent fall year-over-year in January. South Africa was recently overtaken by China, Australia and the United States as the largest gold producers, and is at risk of being overtaken by Russia as the decline continues, according to Statistics SA. Lower ore grades, having to mine increasingly deeper, and declining mine lives have been three of the driving factors behind the decline.
• The Indonesian government recently announced that it will be renegotiating all existing mining contracts. The country’s new law will require all firms to divest the majority of ownership of mines, and applies to all firms with existing “Contract of Work” agreements signed prior to the new rule. The Indonesian government made the announcement that the law is aimed at increasing the participation of local investors in mining.
• Government talks in Peru with illegal miners fell into disarray and turned into a riot which left three people dead. These wildcat miners generally have no formal mining concession or environmental permits to operate nor do they follow international standards. The Peruvian government is attempting to halt the illegal operations within the county.