Gold Market Radar (April 16, 2012)

Gold Market Radar (April 16, 2012)

For the week, spot gold closed at $1,657.35 up $21.12 per ounce, or 1.6 percent from Thursday’s close before Good Friday. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, rose 2.7 percent. The U.S. Trade-Weighted Dollar Index declined 0.3 percent for the week.

Strengths

• On again, off again speculation that the Federal Reserve may need to intervene with more stimulus to shore up the economy led gold to a relatively good week. Both China and the U.S. posted weaker economic data. China’s trade surplus came in at $5.35 billion, substantially greater than the median projection of a $3.15 billion deficit. The weak numbers raised concerns that the world’s second-largest economy faces a deeper slowdown than originally forecasted. In the U.S., nonfarm payrolls rose 120,000 in March, well below market forecasts and a possible sign that momentum in the job market is slowing.
• Randgold Resources jumped 9 percent on Monday on news that a political settlement appears to have been brokered in Mali. Leaders of the recent coup have come to an agreement with the military junta to reinstate the country’s constitution.
• In other positive news, jewelers in India called off their three-week strike over the prior weekend. The Indian government said it would consider scrapping a budget proposal to levy an excise duty on unbranded jewelry. Industry representatives said that if the tax rollback does not materialize the strike would resume on May 11.

Weaknesses

• Technically, silver prices are not following through with the same price strength as gold.  Analysts cite record-high mine supply and demand concerns. In addition, the huge price volatility last year, when the metal crashed 35 percent in a matter of days on two occasions, has dampened silver’s appeal to investors as a cheaper alternative to gold.
• For the second time since February, the CME Group, the largest operator of futures exchanges in the U.S., announced a cut in margin requirements for COMEX silver futures in an attempt to boost liquidity. However, analysts note that margins are still higher than they were last year and it would take some significant interest from investors to drive the price higher.
• The latest Gold Fields Mineral Services (GFMS) report noted that gold prices are expected to be driven by eurozone debt concerns and the prospects of additional monetary stimulus. In their view, gold has the potential to breach the $2,000 per ounce level in 2013. The report also said total cash costs increased 15 percent in 2011 to $643 per ounce, up from $560 per ounce in 2010. Declining mine grades are the largest contributing factor to the increase, contributing $28 of the $83 per ounce net increase. All-in costs (including depreciation as well as general and administrative charges) increased 22 percent.

Opportunities

• Positive economic signs and the rollover of bad European debts through their long-term refinancing operations (LTRO) program pushed the S&P 500 to good returns in the first quarter. However, it is unlikely the recent bright spots are enough for the world’s two great fiat currencies to regain trust from Asia, Russia and the Persian Gulf states. Short-term liquidity issues have been addressed but unsustainable levels of sovereign debt still remain. Western central banks will likely have to keep printing money for some time and those countries with surpluses will have to find a suitable place to park their growing foreign reserves. Currency devaluation has historically been a major policy tool for extinguishing national debt but it also leads to a higher gold price.
• Russia has publicly stated it is raising its gold weighting to 10 percent of its reserves. China, which would like to raise the renminbi to reserve currency status, is eying large gold reserves as well. With official gold reserves sitting at 1,054 tons, China has a long way to go before it can catch up to the 8,000 tons of gold held by the U.S. and the 11,000 tons of gold held by the eurozone. China would likely need to boost the country’s gold holdings in a significant way in order to make its currency competitive in world markets.
• HSBC gold analyst James Steel says that the marginal cost for mining gold, when miners leave low-grade ore in the ground, is about $1,450. Despite a four-fold increase in investment, a lack of great new gold discoveries has made peak gold production a closer reality than peak oil. With world gold output stuck at 2,700 tons for a decade, this creates a natural floor, of sorts, for gold prices.

Threats

• David Rosenberg had some interesting comments on incomes and prospects for a strong recovery in the household sector. The sector has recently been going through the healing process, but is still far from healed. Rosenberg also notes that current real disposable incomes are actually lower than in May 2008 on a per capita basis, $32,600 today versus $34,631 then. Rosenberg says, “You can see why it is that for most people, it is very difficult to talk about economic recovery when real personal incomes have done so poorly and for so long.”
• A recent paper from the African Development Bank (ADB) titled “Gold Mining in Africa: Maximizing Economic Returns for Countries,” points out that gold mining is significant activity in at least 34 of the continent’s 54 countries. The paper notes Africa’s annual gold production is 480 metric tons, 20 percent of annual global output, but concession agreements signed by the governments are unfair. This particularly applies to the royalty rate stated in these agreements. Despite spiraling prices for precious metals, the ADB believes Africa is not cashing in enough from its large gold resources. These agreements severely limit gains from gold mining activity in gold producing countries. However, only a limited number of African countries have actually taken equity stakes in the mines within their borders. It’s worth pointing out that one can only gain access to market returns by risking capital to invest.