Gold Market Radar (June 2012)
For the week, spot gold closed at $1,572.45 down $54.65 per ounce, or 3.36 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 4.73 percent. The U.S. Trade-Weighted Dollar Index gained 0.72 percent for the week.
Strengths
- Bank of America Merrill Lynch’s latest report on monitoring fund flows noted gold-oriented funds saw an inflow of $859 million, the largest inflow since March 2012. Equity funds have seen 13 straight weeks of redemptions, their longest losing streak since December 2008, and investment grade corporate bond funds have seen 28 straight weeks of inflows. Gold stocks are finally starting to attract some attention.
- Yamana Gold made a C$414 million takeover offer – mostly in cash – for Extorre Gold Mines, which owns the high-grade Cerro Moro silver-gold project in Argentina. Extorre’s share price has suffered dramatically over the past few months due to a number of factors: global political and economic uncertainty impacting credit markets; a broad sell-off of all junior non-producing gold companies; concerns with respect to share dilution arising from a decision to develop the Cerro Moro project; and a series of events that have raised the perceived investment risk in Argentina.
- For Yamana, the deal represents a chance to bring a high-grade silver-gold deposit in Argentina into production. Peter Marrone, Yamana chairman and CEO, noted in a prepared statement that the takeover price amounts to only three percent of Yamana’s market capitalization. Yet in Cerro Moro, Yamana could get more than 10 percent of its gold equivalent production.
Weaknesses
- The Fed announced it would extend Operation Twist, which was due to expire this month, through the end of 2012, but that there currently would be no quantitative easing, which again prompted short sellers to focus on gold. Gold closed down this week, although the price action in gold has essentially been in a sideways trading range for the past seven weeks. Silver also closed lower this week at $26.94, its fifteenth down week of the past 17 weeks.
- The Fed did the minimum it could under the circumstances. The bottom line is that the Fed did not want to be seen as overreacting, especially since policymakers don’t yet have a full grasp on whether the recent weakness in the data has been exaggerated by the weather-related boost in spending enjoyed during the winter. With real interest rates already deeply negative, the Fed’s toolbox is quite limited. The cannons have already been fired, bullets are exhausted, and now arrows and stones are about all that’s left. Be that as it may, the Fed held out hopes for more quantitative easing if market conditions demand such action.
- IAMGOLD has outsourced its Quimsacocha gold project in Ecuador to INV Metals for 150 million shares in INV Metals, valued at about C$25 million, which currently has just 70 million shares outstanding. The deal strongly motivates INV Metals to move the development of the 3.3 million ounce Quimsacocha ore body, while allowing IAMGOLD to maintain significant exposure to the property should the project eventually become a mine.
Opportunities
- In South America, there were several stories highlighting countries taking a more constructive view on mining in light of weakening economies around the world. Gold production for the first quarter declined 1 percent year-over-year according to a recent BofA Merrill Lynch report and there has essentially been no growth in production for the last decade despite the strong price gains. With the euro falling into disarray, which was supposed to be the substitute for the U.S. dollar around the world, gold is stepping into that role as central banks continue to accumulate bullion. The Central Bank of Russia announced it increased its gold reserves by 500,000 ounces in May.
- Colombia announced that it expects to auction gold, coal and copper reserves for the first time next year to draw foreign investment into mining, which has lagged spending on oil production. The Ministry of Energy and Mines in Peru said the global economic crisis, now more than ever, requires Peru to promote investment in the energy and mining sectors or lose mining and energy projects to neighboring countries. Recent anti-mining protests in the country have discouraged investors from Peruvian projects although Peru has approved mining projects worth $28 billion. The Peruvian government is expected to get more involved in the prevention of anti-mining conflicts and to help build confidence among the people in communities impacted by mining development.
- In Argentina, the governor of Chubut Province has submitted to the provincial legislature a bill which provides for state ownership of mining operations and an increase of 3 percent to 8 percent in mining royalties. The legislation would maintain the law prohibiting open-pit gold mining that uses cyanide in mining processes, but it appears that certain defined areas may be carved out from the legislation. Pan American Silver, which owns the high grade Navidad silver project in Chubut, may be a beneficiary of such a carve-out.
Threats
- Gold demand in India remained lackluster as the Indian rupee hit a record low against the U.S. dollar. Gold prices are virtually unchanged in U.S. dollar terms since the start of the year, but gold prices in rupee terms have increased by 8 percent for the same period. Higher Indian gold prices contribute to poor physical demand as seen from a drop in bullion imports. In addition to lower gold demand, Indian merchants are reporting greater supply of gold from consumer-scrapping, as recycled materials are being handed in for processing at a faster pace than last year.
- On Thursday, world markets, gold, stocks, commodities and the euro/dollar all reacted badly to the weak economic data from China, Europe and the U.S. The market was reacting to the weaker economic growth data, and the likelihood of deflation. The eurozone "flash" manufacturing PMI fell from 45.1 in May to 44.8, the lowest level in three years. The preliminary reading of the HSBC Chinese PMI index was 48 in June, the eighth month below the 50 level, which signals contraction. The Philadelphia Fed manufacturing index plunged to -16.6, the lowest level since August 2011. U.S. existing home sales also fell in May. All factors seem to be confirming the lower revision by the Fed for growth prospects in 2012.
- The chief investment strategist at GLG Partners, who manages GLG’s Atlas Macro fund, told delegates at the GAIM 2012 conference in Monaco that total debt levels in a number of major economies had actually risen since 2007 and had much further to fall before reaching a semblance of equilibrium. “The crisis has not even started. It will take an extremely long time to reach its peak velocity, and by a long time I mean at least 15 to 20 years.”
