Gold Market Radar (July 2, 2012)
For the week, spot gold closed at $1,597.40 up $24.95 per ounce, or 1.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.25 percent. The U.S. Trade-Weighted Dollar Index lost 0.80 percent for the week.
Strengths
- Gold jumped more than $44 on Friday on the expectations that investors will boost their gold holdings as Europe moves forward with a plan that could lead to more stimulus while the healthcare tax in the U.S. is likely to drive costs higher as more people will have access to healthcare but the new law does nothing to increase the supply of doctors and other healthcare professionals. Data shows that despite the near bear market in gold, investors added almost $2 billion to their holdings in gold-backed exchange-traded funds in June.
- Early in the week Moody’s Investors Service cut its rating on 28 Spanish banks on the likelihood that these banks will require external support. Italy also may need some form of support which is thought to be funded by Germany, France, Spain and Italy. Meanwhile, France’s new president moved to increase the minimum wage. It is as if these countries believe if they can just continue to borrow they will prove that capitalism has failed.
- Central banks continued to buy gold with net purchases recorded during the first quarter of 2012 coming in at 80.8 tonnes. Sales of silver coins in India are reported to be soaring in response to gold prices hitting record highs. Monsoon rains in India have also been delayed and this has hurt gold sales too. In the first quarter of 2012, domestic demand for gold witnessed a 30 percent crash year-on-year.
Weaknesses
- Coeur d’Alene Mines said it anticipates that an impairment charge for the assets of the Martha Mine in the Santa Cruz Province of Argentina will be recognized in the second quarter of this year. The Martha Mine has experienced high operating costs and has a short remaining mine life. Perhaps in response to mining companies signaling they could close up in Argentina, the country loosened its strict currency rules this week, extending the deadline for more than 100 companies to cash in export earnings on the local foreign exchange market.
- It was reported Guatemala’s new president is seeking both legal and constitutional changes for additional mining taxes, as well as a direct stake in mining and exploration companies. President Otto Perez Molina has introduced his proposal for reform of 55 articles of the Constitution of Guatemala including a proposal for the government to acquire up to 40 percent of companies which exploit natural resources in the country. Guatemala’s indigenous population is increasingly at odds with the government’s approval of mining licenses for international companies and major mining projects which aboriginal peoples feel infringe upon indigenous land rights. Tahoe Resources Inc., the developer of the Escobal silver mine in Guatemala, plunged as much as 45 percent on the report that the government proposed taking stakes in mining companies operating in the country.
- TD Securities issued a report showing that since the beginning of 2011, gold producers in its coverage universe have increased annual dividends by 59 percent on average compared to a 15 percent increase in the gold price over the same timeframe. Over the past 18 months, as payouts have increased, multiples (and share prices) have declined. In fact, approximately 50 percent of the increase in yield has come from lower share prices and 50 percent from the higher dividend payouts. TD believes the underperformance of equities relative to gold over the past couple of years has been driven more by company and industry specific issues such as dilutive strategic acquisitions, operating and capital cost inflation, rising political risks, and the challenge of delivering meaningful production growth at acceptable rates of return. To offer yields approaching 5 percent would likely require payout ratios of close to 50 percent of cash flow. The onus going forward is on management teams to demonstrate discipline by shelving low-return projects, increasing dividends and possibly buying assets on attractive metrics.
Opportunities
- Australian gold production fell for the third consecutive quarter with 62 tonnes reported for the first quarter of this year, a 5 percent drop from the fourth quarter of 2011. Russia expanded its gold holdings by 15.5 metric tons valued at $790.7 million last month to the highest level since at least 1993 as central banks are buying more of the metal to diversify their international reserves. Russia more than doubled its bullion holdings in the past five years to 911.36 tons. “These dips give them an opportunity to top up,” said Dan Smith, a commodities analyst at Standard Charters PLC in London. “The momentum is pretty strong from central banks heading into gold and I don’t see anything in the near future that’s going to reverse that. There’s a general perception that currencies are not quite as solid as they were seen.”
- Asian demand for diamonds is set to boom. While in the short term, demand for diamonds globally is struggling, analysts say demand from China and India is set to far outpace the annual 2.8 percent supply growth. In India alone, one analyst notes, the market for diamonds is expected to grow faster than that for gold over the next few years.
- Martin Murenbeeld in his weekly gold analysis lamented in summary that gold will benefit from everything we think needs to be done: more ECB liquidity, QE3, dollar devaluation, fiscal expansion in the U.S., etc. Gold will not benefit from a worsening recession in Europe and a further slide in U.S. growth. Gold will also not benefit from weak growth in India and China. We await the policymakers’ decisions. We agree that the headwind has been the lack of will for politicians to take the necessary actions that must be addressed. Perhaps with the rally in gold on Friday, we are getting closer to realizing the inevitable.
Threats
- The Bank of International Settlements showed in a recent study says that the budgets of most advanced economies, excluding interest payments, would need 20 consecutive years of surpluses exceeding 2 percent of gross domestic product—starting now--just to bring the debt-to-GDP ratio back to its pre-crisis level. Moreover, monetary policy has been bearing the brink of efforts to adjust measures that cannot go on forever and which carry their own risks as economies become dependent on ultra-low interest rates. Politicians cannot continue to dodge the root cause of the problem, spending more than their country can afford.
- The sale of gold coins in India by banks could be curbed with the Reserve Bank of India considering banning such sales. Partly an attempt by the Reserve Bank to help curb rising gold imports, the Bank says it also believes such sales are not relevant to core banking operations. However, banks make very good margins on the sales of gold coins in smaller denominations which are considered apt for corporate gifting and rewards for contests or for commemorative giveaways.
- The African National Congress delegates will begin debating proposals for a mining windfall tax of 50 percent as an alternative to nationalizing mines in the world’s largest producer of platinum, chrome, and manganese. South Africa’s President Zuma, who is seeking a second five-year term in a party election in December, is under pressure from his labor union allies and a growing number of jobless young people to do more to combat poverty and unemployment in Africa’s largest economy. The 100-year-old ANC was pushed by its Youth League in 2010 to investigate the viability of nationalizing mines to help distribute more wealth to the black majority. While an ANC-appointed panel ruled out nationalization as an economic “disaster,” it recommends a 50 percent tax on profits of mining companies that earn returns of more than 15 percent. “The recessive policy choices of this government are making sure South Africa cannot be seen as a serious player in the global economy,” Claude Baissac, the Johannesburg-based founder of country-risk consultants Eunomix.
