Gold Market Radar (April 2, 2012)
For the week, spot gold closed at $1,668.90 up $6.45 per ounce, or 0.4 percent. However, gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 0.4 percent. The U.S. Trade-Weighted Dollar Index slid 0.5 percent for the week.
Strengths
- Early in the week, comments from Federal Reserve Chairman Ben Bernanke suggested the need for continued accommodative monetary policy. This brought prospects of QE3 back onto the horizon and helped provide a floor to the recent downswing in gold prices.
- Queenston Mining sold their joint venture property to Kirkland Lake Gold for $60 million and a royalty this week. Factoring in this $60 million, the company now has $120 million in cash and cash equivalents on their balance sheet. This will be used to fund exploration and advance the feasibility study of the Beaver Creek project. The market reacted positively to this and the stock outperformed the major gold indexes for the week.
- AuRico Gold sold two small gold mines in Australia to Crocodile Gold this week. This came as no surprise to the market as AuRico had been talking about the sale of their assets before. The total amount of the sale is $105 million (Canadian), or $0.32 per share. In our eyes, AuRico sold their mines for too little, but when you consider the increasing operating costs for the company’s Australian assets, it was the right thing to do strategically.
Weaknesses
- Following 12 days of protests by gold traders across India, the Indian government has said that it will review the tax on ‘unbranded’ gold jewelry. Former finance minster Yashwant Sinha pressed for a rollback of the excise duty on nonbranded jewelry, and called for doing away with the newly required Permanent Account Number (PAN) card to document any gold jewelry purchases worth greater than roughly $4000. The PAN card allows the government to track significant gold purchases and would have to be documented on an individual’s income tax returns.
- Speaking to the Indian parliament, Pranab Mukherjee said, “I know it (gold) is part of our culture … but the import of gold of such magnitude strains balance of payments and affects exchange rate of the rupee through impacting supply-demand balance of foreign exchange.” He went on further to express his concern over the outflow of precious foreign exchange on the import of “dead assets that cause problems in the country.” We think Mukherjee may be confused as to which is asset, gold or the rupee, is the “dead” one.
- Centerra Gold took a hit this week, down 15 percent on Tuesday alone, on news that ice and waste movement has halted production at their Kumtor mine. In response to the disruption, the company revised and reduced its 2012 gold production by 33 percent to 570,000-625,000 ounces. The news proved to be a great buying opportunity as Centerra finished the week only down 1.8 percent.
Opportunities
- Goldman Sachs urged traders to buy gold in a research note this week. The company’s research shows U.S. real interest rates as the primary driver of U.S. dollar-denominated gold prices. Their models suggest the current level of real interest rates would be consistent with the current trading range of gold prices. As they look forward however, their U.S. economists expect subdued growth and further easing by the Federal Reserve in 2012. They forecast this would push the market’s expectations of real interest rates back down near zero and gold prices back to $1,840 an ounce.
- Franco-Nevada Corp CEO David Harquail said that with share prices lagging, miners are wary of turning to equity markets to raise money and are exploring all alternatives such as stream deals or royalties. The latter are at an all-time high, but with most deals happening in the mid-tier market, ones over $500 million will be few and far between. We have a feeling there will be a number of royalty streams locked-in this upcoming year.
- In an interview with the Gold Report, Brent Cook commented on some trends he has noticed gold sector. He emphasized that companies are starting to recognize that quality of a mineral deposit supersedes size. “Grade, or more succinctly margin, is getting more and more important ... These junior companies with these large, low-grade, low-margin deposits are then doomed to build.” On a supply-demand basis though, all signs point to gold going up. Brent says that 83 million ounces are being mined annually right now while only 20-30 million ounces are being found per year. This gap between production and discovery is not being filled and can only point to a better gold environment.
Threats
- Still no conclusion or real progression out of Mali, but Randgold Resources CEO Mark Bristow said that the Bamako airport has reopened and the borders are open for all traffic. He maintained that the company’s Loulo complex was replenished with fuel supplies over the weekend and that all three of the Randgold mines in Mali were operating in full.
- RenCap Securities held a special conference call on the situation in Mali. Their consultant expects economic pressure–primarily in the form of sanctions and suspended Western aid–to be the primary outside intervention in Mali. This could hamper import and export activity, though the rebels have promised to transition to new elections.
- However, no timetable exists for the transition and given the rebels’ lack of organization; they may be tempted to stay in power for a period of months in order to found a political party. This could mean that sanctions have the time to truly bite. Any such sanctions, however, would be leaky by virtue of the lack of bureaucratic capability to enforce them among Mali’s neighbors.
