Gold Market Radar (April 23, 2012)
For the week, spot gold closed at $1,642.93 down $15.22 per ounce, or 0.9 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 2.8 percent. The U.S. Trade-Weighted Dollar Index slid 0.93 percent for the week.
Strengths
- The Indian Government’s postal department announced it will be offering a 6 percent rebate on gold coins of various denominations for the forthcoming Akshaya Tritiya Festival starting April 24, which is one of the biggest gold buying festivals in the country. The rebate will likely attract significant buying interest, particularly since the recent three-week strike by jewelers in the country shut in a lot of retail demand. The word “Akshaya” means imperishable or eternal. It is believed that purchases of gold made on this day are considered to bring success or good fortune.
- In Canada, the Harper government has announced a plan to streamline major project review at the federal level, while leaving smaller project permitting to provincial regulators. The proposal would set defined timelines for key regulatory permitting processes, as well as for hearings, panel reviews and standard environmental assessments. It would also consolidate the number of organizations responsible for reviews from more than 40 to just three. In recent years, Canada has seen a number of non-profit organizations from the U.S. funnel money into lawsuits in its country with the express purpose of delaying development of major projects that would create jobs in Canada.
- AuRico Gold has taken a second step to divest non-core mines with the sale of its El Cubo silver-gold mine in Mexico in a $250 million cash and shares transaction with Endeavour Silver. AuRico Gold had recently inked a deal to sell two mines in Australia. Most companies are reluctant to sell assets as they worry investors will penalize them for reducing their production profile, even if the operations don’t make money. However, AuRico picked up ownership of the Young Davidson Mine from its purchase of Northgate and expects to produce gold there with higher margins as compared to the properties it sold.
Weaknesses
- With all official trading and financial ties with Syria being severed there were stories this week that Damascus was looking to offload everything it could to raise cash, including currency reserves. Two gold traders in the United Arab Emirates said the Syrian government has been offering gold at a discount, with one saying it was making offers at about 15 percent below the market price. The World Gold Council estimates Syria had about 25.8 metric tons of gold as of February 2012, representing about 7.1 percent of its total reserves.
- Harmony Gold, South Africa’s third-largest gold producer, became the latest miner to report a sharp drop in output in the first three months of 2012 because of an increase in government-ordered safety stoppages. Harmony’s CEO Graham Briggs lamented that while the government’s safety drive has softened since February, the campaign bordered on being punitive. Africa’s top gold producer, AngloGold Ashanti, noted that safety stoppages had cost 76,000 ounces of lost production in the first quarter of 2012.
- Scotia Capital analysts noted that some gold miners are hedging again and that we are likely to see the first year of net hedging in over a decade. Scotiabank GBM estimates about 15 tons of net producers hedging in 2012 which is less than half a percent of new mine supply. Scotia does not believe that senior gold producers will change their hedging strategies, but the market is principally seeing hedging come from non-gold producers trying to secure financing for base metals projects and from smaller producers that require bank financing to build their projects.
Opportunities
- According to the median estimate of the top five precious-metals analysts in Bloomberg Rankings in the past two years, these analysts expect the gold price will average $1,900 an ounce in the fourth quarter, a 16 percent increase over the current price. The analysts noted that central banks are joining investors in buying gold, adding 439.7 tons in 2011, the most in almost five decades. Citigroup and Deutsche Bank predict purchases of 400 tons and 500 tons, respectively, in 2012 by central banks. Retail buying should continue as many individuals are worried about currency debasement. With real interest rates essentially at zero, any rise in long-term bond yields would destroy capital.
- GFMS forecasts a high of just above $40 for silver this year with a short-term forecasted trading range of between $28.70 to $32.90 an ounce in the second quarter. While its research shows that the silver supply is growing, it is interesting to note that net government sales of silver fell by a hefty 74 percent to a 14-year low of 11.5 million ounces, driven by a sharp decline in disposals from Russia. In 2011, hedging in silver amounted to about 10.7 million ounces or 334 tones of supply. New hedging was dominated by companies for whom silver is a by-product.
- Not only is Canada getting fed up with stalling delays by anti-mining activists, but so is the U.S. Congress. Former Nevada Mining Association President turned Congressman, Mark Amodei, introduced the Strategic and Critical Minerals Production Act (H.R. 4202) aimed at streamlining the federal permitting process for mineral development. Amodei pointed out that in the 2012 ranking of countries for mining investment, the U.S. ranked last, tied with Papua New Guinea, in permitting delays. This bill is intended to streamline the permitting process to leverage our nation’s vast mineral resources without changing environmental and other protections provided by current laws and regulations. Mr. Amodei said H.R.4202 “ensures American mineral mining projects are not indefinitely delayed by frivolous lawsuits by setting reasonable time limits for litigations.”
Threats
- Europe’s debt problems are back after going through a long-term refinancing operation (LTRO) bailout just a couple of months ago. David Rosenberg of Gluskin Sheff Research wrote there is now chatter that the central banks are going to have to reignite their program of buying Spanish debt outright. David points out that despite the good intentions of the program, all LTRO did was make the banks even more susceptible to eroding balance sheet quality by having them load up on the spurious debt of these fiscally-challenged governments. Skyrocketing yields on Spanish bonds suggest that these banks have likely incurred significant losses on their “carry trade” investments in government bonds, a maneuver encouraged by the European Central Bank, in the ironies of all ironies, notes David.
- Comex-monitored warehouses reported that silver stockpiles rose to their highest level in at least 10 years, showing near-term supply of the metal is plentiful as mine output holds at record levels. The U.S. silver stocks held at the five exchange-approved depositories just recently stood at 141.59 million ounces, the highest since Reuters data was first compiled in 2002, and have risen by about 40 percent over the past year. Silver stocks fell to their lowest level in nearly a decade at 97.86 million ounces last June, shortly after prices crashed due to a barrage of margin hikes when silver approached $50 last year.
- Argentina’s expropriation of YPF in its oil sector made for a headwind in the mining stocks which operate within the country. It should be understood that Argentina imports vast amounts of fuel and the government has said it is unhappy with Repsol’s management of YPF and its inability to bolster domestic oil supplies. Repsol points out the supply issue has more to do with Argentina’s price controls than anything else. For the mining sector the same dynamics are not at work. An analyst pointed out that Argentina uses about 38,000 tones of refined copper a year but produces about 117,000 tons of copper concentrate. For the copper industry it makes no sense for Argentina to nationalize the copper miners, because they do not have the capacity to smelt it.
