Gold Market Radar (July 16, 2012)

Gold Market Radar (July 16, 2012)

For the week, spot gold closed at $1,589.68 up $5.93 per ounce, or 0.37 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 4.72 percent. The U.S. Trade-Weighted Dollar Index drifted 0.10 percent lower for the week.

Strengths

• Corporate insiders buying back their stock is a strong vote of confidence that shares are undervalued.  Recently, Serafino Iacono, Gran Colombia’s co-chairman has been on a stock buy back spree.  In April, Iacono owned around five million Gran Colombia shares.  Now, after three months of systematic share buying, he holds over 12 million Gran Colombia shares.  The buying comes as Gran Colombia’s share price trades, like so many other gold stocks, near 52-week lows.  A number of company executives are lamenting that their shares are undervalued but few are putting their money where their mouth is.
• Despite problems seen by some commentators regarding the Argentina government’s attitude toward mining, Latin America-focused junior gold miner, Minera IRL, indicated that it is set on proceeding with its Don Nicolas project in Argentina.  The Don Nicolas project is located in Patagonia’s Deseado Massif in mining-friendly Santa Cruz province where gold and silver mining has been under way for some time.  Patagonia is sparsely populated with little agricultural significance and mining is proving to be a great boost to its economy.
• Dundee Precious Metals bounced back this week with the Namibian government allowing the company to raise the flow rate at the Tsumeb smelter to 75 percent of operating capacity versus 50 percent.  Dundee was able to demonstrate that fugitive emissions were now largely contained with its ongoing program to upgrade the environmental performance of the plant since it purchased the smelter.

Weaknesses

• Anti-foreigner campaigners have emerged as the big winners in Mongolia’s June election.  Increasing power is bad news for the international mining corporations which have been trying for years to get potentially huge projects going there.  “The fact that several resource nationalists won increases the uncertainty for investors,” said the Mongolia manager for Canada’s Prophecy Coal.  Ivanhoe Mines fell 11 percent over the course of the week on the news.  More than a quarter of the 76-seat parliament is now held by politicians who advocate local control of mines
• “Free Cash Blown was the pre-release strikethrough title of one analyst’s second quarter earnings preview for the gold stocks. The title was ultimately edited to “Low” instead of “Blown” before press time this week.  With the gold price off nearly 5 percent in the second quarter and other by-product metals such as silver, copper, lead and zinc all down in price it is not a surprise that earnings will likely decline for reporting purposes.
• Since the price of gold has experienced its first notable quarterly decrease since the fourth quarter 2008, despite near-record quarterly average gold prices, analyst Josh Wolfson anticipated no companies under his coverage to report positive free cash flow, as rising capital spending budgets have outpaced operating cash flow leverage.

Opportunities

• According to Benjamin Cox, Managing Director of Oreninc, he anticipates there is going to be a feeding frenzy in the junior mining space this fall as the major gold companies look to replenish ounces at some of the cheapest levels seen for a very long time.  Cox points out that you can’t sink drill holes for less than what these juniors are trading at.  “I see majors standing there and saying wow, we can replenish out ounces and tonnes in the ground for the cheapest amount we’ve ever been able to do it. Even if they offer a 50 percent premium to current share prices it’s still a 70 percent discount to historical share prices.”
• The Gold Report interviewed George Topping of Stifel Nicolaus on his view that gold companies need to look toward aiming for a 5 percent dividend yield to attract fund flows back into the sector.  Large international mining companies have dividends that are much higher than the gold companies but as George points out the gold companies have been trying to grow gold production at any price.  We call it “GAAP,” growth at any price.  Circumstances have changed.  Growth is now unaffordable due to inflation.  Capital costs have doubled in the last four years.  It’s time for the gold mining companies to wake up, stop building these new $6 billion mining projects and pay more dividends to shareholders.
• Gold will climb to a record by year end as the global economy slows from the weight of too much debt, says Eric Sprott, the founder and chairman of Canadian fund manager Sprott Inc.  “I just can’t imagine the demand for gold is going down.  I don’t personally see a solution to the problem we are in, the financial leveraging issue that we all have where everybody wants to shed debt and there’s no buyers.”  He expects bullion will rise as investors seek the safest assets while governments spend to stimulate their economies, increasing chances that inflation will accelerate.

Threats

• The Reserve Bank of India is looking to mobilize the country’s idle gold deposits. The bank is mulling ways other than direct curbs on imports of gold to reduce the current account deficit. The Deputy Governor of the Reserve Bank of India (RBI) said the bank is considering financial instruments that mimic the returns of gold. The idea is to put the idle gold to productive use. At this point there is still no clarity on how such a plan would be constructed.
• The recent High-Tech Strategist report by Fred Hickey noted how the low interest rate policy of the Fed is crushing savers and there is no end in sight.  While negative interest rates are good for gold due to the fear trade, it doesn’t help much in the love trade arena where investors lack confidence in the politicians to implement sound policies.
• Hickey further points out that next year the top dividend tax rate will be 43.4 percent at the federal level.  One has to ask, why would anyone continue to invest in a high-risk environment?  If you find a way to win, you can give nearly half of your gains to the government, but if you lose--well you can write off $3,000 per year against ordinary income.  It’s no wonder trading volumes are collapsing.