Gold Market Radar (August 20, 2012)
For the week, spot gold closed at $1,616.05 down $4.15 per ounce, or 0.26 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.14 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.05 percent for the week.
Strengths
- Despite the dollar’s steady rise since the start of the summer, the gold price continues to defy efforts to push it lower. Technically, gold has now traded above both its 50- and 100-day moving averages and the seasonally strong autumn rally in gold could well play out again this year.
- Gold sentiment likely got a boost when recent filings showed billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion. In addition, the $25 billion Soros Fund Management LLC portfolio also made a sizable increase in its exposure to bullion. The Soros Fund, based in New York, raised its existing weight by slightly more than 175 percent from the previous filing. And finally, investment funds in China soon plan on launching the country's first batch of gold exchange-traded funds, according to the state-run Shanghai Securities.
- Nomura International Plc told clients that the gold price is “not heavily pricing in QE3,” referring to so-called quantitative easing. “The potential upside, were QE3 to be introduced, would likely far outweigh any potential downside. Even if it is not introduced, real rates remain very low and the gap between them and gold is large.”
Weaknesses
- Great Basin Gold announced this week that CEO Ferdi Dippenaar has resigned with immediate effect. This is due to a strategic review process begun as a result of delays at the group's Burnstone operation in South Africa. On release of the news the stock tumbled 50 percent. In recent months, both Aaron Regent and Tye Burt, CEOs of Barrick and Kinross, respectively, also have been shown the door during these tough times for gold miners.
- Clive Johnson, the president and CEO of B2Gold Corporation, expressed his frustration on the company’s quarterly conference call with regards to the difficulty of trying to get distressed companies to come to the table for a potential acquisition. Johnson noted the self-interest of management versus the shareholders was clearly evident in that many companies either are unwilling to sign confidentiality agreements or, if they are, they come with caveats – shackles in the form of standstill agreements – that make it tough to do anything.
- The World Gold Council (WGC) recently reported that gold demand reached 990 tonnes in the second quarter, down 7 percent from a year ago. The weaker trend in investment, jewelry and technology demand for gold was compensated by the Central Banks' surging appetite, which led to the largest quarterly increase since the second quarter of 2009. Though both China's and India's gold consumer demand declined year-on-year in the second quarter, retail investment demand ex-China and India actually rose 16 percent. In particular, the European purchase of bullion bars and coins rose 15 percent, revealing investors' demand for gold for capital preservation in light of the European debt and banking crises. The WGC highlighted that Russia will continue to be a driving force in the gold market. It is now the fourth largest consumer of gold jewelry, and has the world's eighth largest gold reserves.
Opportunities
- David Prowse, Metals and Mining Specialist Sales at Bank of America Merrill Lynch, recently visited a number of accounts in New York and Boston. David reported that he was perhaps halfway through the second day before a single investor had mentioned gold or gold shares. It has essentially been a year since gold peaked last August and few have interest in the shares these days making it that much easier to pick up a reasonable position without much market impact.
- Barron’s also carried a technical analysis of gold bullion versus the gold stocks this past week. The publication noted that for the first time in more than two years, gold stocks are looking better than the metal, although they are not yet fully in bullish mode. Barron’s pointed out that the desire to sell gold stocks versus gold itself reached a climax in May and since then the short gold stock trade looks to have washed out, perhaps establishing a price floor, and making their risk/reward profile look fairly good
- Since February, the COMEX speculative position on silver has fallen by 72 percent. A survey of hedge funds showed they are the least bullish on silver in almost four years. However, physical holdings of silver via exchange-traded products has climbed for three months and is now valued at $16.2 billion. In the coming weeks, the Jackson Hole Fed retreat may be the last chance the Fed has to act before the presidential election.
Threats
- Platinum producers in South Africa, which account for 75 percent of world output, are facing plunging profits, surging energy costs, and labor instability. Lonmin plc has been at the epicenter of the crisis. The labor unions have been the nucleus of the problem where the Association of Mineworkers and Construction Union (AMCU) has been targeting the platinum mines to extend its membership at the expense of the established mining unions, the NUM and Solidarity which are nowadays seen by some as part of the mining establishment. Several murders took place between the rival factions so police were called in. Unfortunately the conflict escalated with 34 deaths at the Lonmin Mine.
- Some believe David Rosenberg of Gluskin Shelf to be a perennial bear but he’s pretty much one of the few strategists who is willing to mention the bad news and bare the disdain of those who want us to keep the rose-tinted glasses on. Dave noted this week that the spike in food and gas prices casts a cloud over the back-to-school shopping season.
- With regard to investors’ appetite for income-producing securities versus taking the risk of parking cash in the equity markets and trying to sleep at night, Mr. Rosenberg pointed out that that retail investors eagerly snapped up nearly one-third of the largest municipal debt deal of the year, a $10 billion one-year bill issued by California with a range of 0.3 to 0.55 percent.
