Gold Market Radar (July 30, 2012)
For the week, spot gold closed at $1,622.90 up $38.40 per ounce, or 2.42 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.36 percent. The U.S. Trade-Weighted Dollar Index slumped 1.00 percent for the week.
Strengths
- Agnico-Eagle Mines was one of the few upside surprises this past week, finishing with a price gain of 15.1 percent. The company showed continued strength in its second quarter results and upped 2012 production guidance while its peers did the opposite.
- Randgold Resources reported that initial mining was underway at its massive Kibali gold project in the Democratic Republic of Congo (DRC). The company reported excellent progress and initial pit stripping on one of Africa’s potentially most challenging gold megaprojects at Kibali in the DRC. Randgold, the operator and 45 percent partner in the project with Anglogold Ashanti, envisions the current life of mine plan to average production of approximately 600,000 ounces of gold per year for the first 12 years, with an average grade of 4.1g/t.
- Mineweb reported that Hong Kong’s largest gold storage facility, which can hold about 22 percent of the bullion now in Fort Knox, will open in September to meet rising demand from banks and the wealthy. Hong Kong is emerging as a very important center for gold, especially because it acts as a doorway to China. The current list of hubs include New York, Zurich and London, but there is a growing demand to set up an Asian hub for physical gold storage as wealth departs socialist countries.
Weaknesses
- Australian mineral drilling companies are looking to pack up shop and head to Africa and other regions in response to the collapse in new mining development in Australia. The Gillard government policies have decimated the local mining industry. Earlier in the week, Deloitte Access Economics predicted the mining boom would last only another two years in Australia while the country’s resources minister Martin Ferguson said the era of high commodity prices was already behind us.
- Gold Fields was ordered to shut down its heap leach operations at its Tarkwa gold mine in Ghana due to a directive from the country’s environmental protection agency requiring the miner to stop discharging water from the heap leach section. Tarkwa is a major gold producer for Gold Fields and is a world class gold mine. In 2011 the mine produced 717,000 ounces of gold of which the heap leach section accounted for just under 200,000 ounces. The Ghana EPA directive requires that all water discharges from the heap leach section be run through a water treatment plant to reduce the dissolved salt levels in the effluent which are a non-toxic pollutant.
- NovaGold, a favorite for those who want to own a long-term out-of-the-money call on higher gold prices, fell 29 percent this week as the prospects for future development were shelved.
Opportunities
- UBS Precious Metals Strategist, Dr. Edel Tully, believes the market is ill-prepared in terms of sentiment and positioning to deal with a surge in gold. She notes the COMEX gold net long position has fallen over 50 percent the past year and there is a large disconnect between paper and the physical market.
- The inverse correlation between the dollar and gold appears to have broken down. In the first five-and-a half-months of the year, gold was inversely correlated with the dollar to a certain degree. Since then, this inverse correlation has virtually disappeared, meaning that dollar strength has not depressed the gold price.
- James Rickards, author of The Currency Wars, recently commented that he estimates that mispricing in the LIBOR market by just 10 basis points on an estimated $500 trillion in the swap market over the last five years could lead to an estimated $2.5 trillion in potential damages which lawyers will be eager to pursue. This could become a negative for financials and the economy. Rickards further noted that the next quantitative easing (QE) to be announced will be open-ended, doing whatever it takes to achieve a defined goal. The problem with QE2 was that it was for a defined dollar amount and time period, so the market quickly discounted its effects.
Threats
- Platinum and palladium are seeing some bearish data points with a selection of European car manufacturers reporting declining vehicle sales in Europe of between 14 to 17 percent with expectations sales will fall further. Car sales in North America have generally been strong, but economic growth has stalled. Europe is a key market with respect to the use of platinum in catalytic converters for diesel engines. In addition to car manufacturers scaling back capacity, Volvo, the world’s second-largest truck manufacturer has reported a second quarter decline in new orders of 19 percent year- over-year, including a 43 percent drop in North America. Platinum group metal refiner Johnson Matthey reported this morning that its refining business was down by about 20 percent during the second quarter.
- The price of grain, America’s biggest crop, has surged more than 50 percent since June 15. It is estimated food inflation may rise to 3 to 4 percent in 2013 after the current drought, as the effects of the country’s worst drought since the 1950s work their way onto supermarket shelves.
- With the U.S. being the biggest corn exporter and as a result of ethanol mandates to supplement gasoline demand utilizing perhaps greater than 40 percent of this year’s crop, we could see food prices surge worldwide, possibly discouraging central banks from easing monetary policy. Last year, 42 percent of China’s soybean imports came from the U.S. In 2012, that number has risen to 58 percent year-to-date. One of the catalysts of the Arab Spring was a rise in food prices.
