Gold Market Radar (August 13, 2012)
For the week, spot gold closed at $1,620.20 up $16.42 per ounce, or 1.04 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.05 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.22 percent for the week.
Strengths
- Merger and acquisition activity is picking up. On Monday, Australia's Silver Lake Resources said it will acquire Integra Mining in an all-scrip deal to create a gold miner with a market value of nearly $1 billion. The combined companies would create a gold producer with a 6.6 million ounce resource base, with current production of 200,000 ounces projected to more than double in 2014.
- Endeavour Mining’s announcement that it plans to acquire Avion Gold sent Avion’s shares up 20 percent.
- Overall, few companies have reported positive dynamics with their second-quarter updates. However, Randgold is certainly the exception and reported group gold production of 210,534 ounces of gold in the quarter, a 27 percent increase over the first quarter and a 14 percent rise over the second quarter of 2011, and with a pleasant decline in total cash costs to boot. Randgold Resources, under the leadership of Mark Bristow, is well on its way to becoming a Tier 1 gold miner and its latest milestone is the official opening of its Gounkoto mine in Mali. Capital cost to develop the mine was repaid in less than a year.
Weaknesses
- Roy Sebag of Natural Resource Holdings compiled a report showcasing the rarity of +1 million ounce gold deposits. Of the 439 mines or deposits identified, 189 were identified as producing mines owned by companies. This left only 250 undeveloped deposits but the declining quality of available resources was also shown. There is a 37 percent drop in grade between that of producing mines as compared to undeveloped deposits. Higher gold prices will be needed to bring these projects into production.
- In a story published Sunday, the Financial Times stated, "A four-year investigation into the possible manipulation of the silver markets looks increasingly likely to be dropped after U.S. regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation." One analyst we spoke to commented that regulators in the U.S. are much more interested in prosecuting foreign banks for any misdoings. Potential charges against Goldman Sachs in relation to the mortgage-backed securities scandal were also dropped this week as the Justice Department backed off the case. However, HSBC, Barclays, and now Standard Bank are being pursued on changes ranging from money laundering of the drug trade, fixing interest rates, to allowing illegal trade with Iran.
- Sentiment towards the junior miner space is still weak, at least for the roughly 1,000 prospectors attending the Diggers and Dealers conference in Australia, which has made its industry uncompetitive with taxes and regulation.
Opportunities
- Silver stocks outperformed their golden peers this week. The catalyst was likely the recent fully subscribed $200 million offering of new units by the Sprott Physical Silver Trust and with the associated green shoe being fully taken up by the underwriters. What this means is Sprott will be in the market looking to acquire some 8 million plus ounces of physical silver to fulfill the mandate of the trust. When Sprott launched the Physical Silver Trust securing 15 million ounces, it took a full three months before delivery of the metal was received and, according to Sprott, some of the delivery had not even been mined when the order was put in.
- Draft Russian legislation could facilitate foreign mining of gold and other precious metals within its borders. Undoubtedly, the Russians have realized their overly protective restriction of excluding foreign companies from mining significant gold deposits means that the gold is unlikely to get mined. The draft bill would allow foreign-owned businesses to mine deposits of up to 250 tons (about 8 million troy ounces) of gold, five times the existing cap of 50 tons set in 2008, without facing additional regulation from the state, the documents showed. Another important measure is the suggestion that a discoverer of a strategic deposit could proceed to mine development without the threat that the government could withdraw the license. This should spur more mineral exploration.
- Jamie Sokalsky, the new CEO of Barrick Gold, showed some confidence on his expectations of a turnaround at the company when he acquired 50,000 shares of his own stock through open market purchases recently.
Threats
- Niall Ferguson recently penned an essay on the “Stationary State” of the U.S. economy. The mood disorder is especially bad for investors. Only seven out of 47 national stock markets around the world have posted gains in the last 12 months. Ferguson noted that the U.S. economy has created 2.6 million jobs since June 2009. In the same period, 3.1 million workers have signed up for disability benefits. Back in 1992 there was one person on disability benefits for every 36 people in employment. Now the ratio is 1 to 16. Unemployment is being concealed—and rendered permanent—in ways all too familiar to Europeans.
- Nikos Kavalis, an analyst at RBS, noted he was struggling to see where the kind of volumes of investment in gold that we got in 2009 and 2010 are going to come from. Even if there is another round of quantitative easing he feels we are getting close to game over for gold as a lot of investors are reluctant to expand positions. Analyst Robin Bhar of Societe Generale shares Nikos’ disillusionment. "What's the upside to gold with more QE? Maybe $1,800 - certainly not new highs," he commented.
- More trouble for the platinum miners were hinted at this week as the Department of Mineral Resources in South Africa is said to be contemplating having the miners re-up the ownership stakes that were lost by certain Black Economic Empowerment partners that had margin calls, due to being financially extended, and were forced to sell down their ownership stakes.
