Gold Market Radar (March 26, 2012)

Gold Market Radar (March 26, 2012)

For the week, spot gold closed at $1,661.90 up $1.90 per ounce, or 0.1 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.4 percent. The U.S. Trade-Weighted Dollar Index slid 0.6 percent for the week.

Strengths

• U.S. Mint gold and silver bullion coin sales rebounded from disappointing lows in February. As of Sunday, March 18, gold bullion sales totaled 30,000 ounces, while overall gold bullion coin sales in all sizes were reported at 31,500 ounces. In February, these sales were 20,000 ounces and 21,000 ounces, respectively. Sales of one-ounce silver bullion coins were 1,647,000 ounces, a substantial increase over the 1,490,000 ounces reported for the entire month of February.
• According to an industry source and a Financial Times report, the fall in gold prices has prompted one or more central banks to buy as much as four tons of bullion in recent weeks. The purchases, worth about $250 million at current prices, were reportedly made through the Bank for International Settlements (BIS). The FT said banks have bought between four and six tons in the over-the-counter physical market last week.
• Zambia’s Finance Minister said that the country will not bring back the 25 percent mining windfall tax it scrapped in 2009 because it may force mine closures. This is the first that we have heard in some time of a country realizing the negative implications for demanding an increased share in the mining companies’ profits.

Weaknesses

• After closing up shop for five days over the introduction of an additional tax on gold imports, bullion traders across India decided to open their shops on Thursday, following late-night developments with government officials to end the impasse. More than one hundred thousand bullion dealers across the country had shut their shops as a form of protest, and traders estimate they could have suffered a revenue loss of over $700 million in sales.
• Bernanke’s speeches haven’t been falling on deaf ears, with Turkish, Indian and Vietnamese governments wary of gold. The governments of the three countries are facing weakening currencies, widening trade deficits, and a population buying more and more gold. In line with Bernanke, all believe gold should bear much of the blame.
• Thursday morning, news quickly spread of a military coup in Mali, as reports emerged that soldiers had overthrown President Amadou Toumani Toure’s government and seized power. The stated objective from the Malian army has been to end an “incompetent regime,” condemning the government of its inability to fight terrorism. Randgold Resources, which owns three mines in Mali, plunged as much as 17 percent in London on the news before rebounding to about 12 percent off. The CEOs of IAMGOLD, Randgold and AngloGold Ashanti all have maintained that production has yet to be affected.

Opportunities

• The Financial Times reported this week that Deutsche Bank has plans to open a new precious metals vault in London next year, seeking to cash in on booming investor demand for physical gold and silver. In London, which is the center of the global bullion market, vault space is running low even as the growth in exchange-traded funds (ETFs) backed by precious metals has led to a steep rise in demand for vaults.
• Although India may have increased taxes for gold, the move could present an opportunity for silver, the poor man’s gold, to shine. After escaping India’s budget reforms, investors have shown a keen interest in buying one kilo silver bars. On Friday, India’s Finance Minister exempted branded silver jewelry from excise duty. Silver coins of purity 99.9 percent and above were also exempted from excise duty. However, the excise duty on refined gold was doubled from 1.5 to 3 percent. “Silver has clearly been exempted for a reason,” said Prithviraj Kothari, president of the Bombay Bullion Association. “Out of $50 billion worth of imports of precious metals into India, silver imports were just $4 billion, while that for gold was the other $46 billion,” he said.
• According to a survey of fund managers, the era of quantitative easing, a process by which central banks buy assets such as government bonds to inject funds into the markets, may be coming to an end. According to a March survey by Bank of America Merrill Lynch, investors are “more upbeat about the future and the prospects for growth and they no longer expect further quantitative easing measures to be taken by the Federal Reserve or the European Central Bank.” The report, however, did find that fund managers still see sovereign debt as the biggest tail risk to the global recovery. Investors foresee higher inflation, with a net 13 percent expecting it to rise in the coming year. All in all, the uncertainty could continue to bode well for gold prices continuing to rise.

Threats

• In another move to control mining companies’ financials, Zimbabwe ordered mining firms to bank locally this past week, depositing their export earnings with local banks. This comes as the government’s latest move to exert pressure on miners as it tries to address the dollar crunch afflicting its economy. Last week, Impala Platinum, the world’s second-biggest platinum producer, bowed to pressure and said it would surrender a 51 percent stake in its Zimplats unit to local black investors.
• The implications of a silicosis class action suit for the South African mining sector are very serious, but no one yet knows how it will all play out. On Tuesday, a South African lawyer said that he was preparing a class action lawsuit against leading gold mining firms on behalf of thousands of former miners who say they contracted silicosis, a debilitating lung disease, through negligent health and safety practices. The principal targets of the suit would be AngloGold Ashanti, Gold Fields and Harmony Gold—South Africa’s three biggest gold miners—and minor producer DRDGOLD. The implications for the gold mining industry and for its relations with the government—already strained by past talk of nationalization—could be huge.