Gold Market Radar (September 2, 2012)
For the week, spot gold closed at $1,692.01 up $21.46 per ounce, or 1.28 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.69 percent. The U.S. Trade-Weighted Dollar Index slipped lower, falling 0.43 percent for the week.
Strengths
- The tides appear to be turning. Since the February $1,790 highs in gold and Bernanke’s stalling on any new stimulus measures, gold has been the fast money’s favorite short with each ensuing Fed meeting.
- However over the last couple of months, Fed meetings have produced only modest pull backs in gold that were met with heavy accumulation. Gold inventories held in ETFs have been on the rise with nearly 38 tons of accumulation in August just in the U.S.’s most widely traded product, marking the biggest inflow since November. Gold held in ETFs now exceeds Italy’s national reserves of gold, which are the third largest in the world.
- The $36 plus jump in gold on Friday, as it initially slumped close to its 200-day moving average after Bernanke’s speech, set a very strong tone for investors to get long and don’t be wrong.
Weaknesses
- The labor conflict between the South African unions at the platinum mines has started to spill over to the gold mines. Labor at Gold Fields Kloof-Driefontein operation started an illegal strike at the close of the week and caused its share price to miss out on any of the gains produced by the surge in gold. This mine accounted for 31 percent of Gold Field’s production last year.
- In addition, Gold Fields said it expected Ghana to announce a 10 percent windfall tax by the end of next month. Gold Fields has been trying to get a tax stability agreement in place for the last eight years with regards to its Tarkwa mine. This may be a bargaining ploy to signal to Ghana that new investment in the country will be a risk if an agreement cannot be reached.
- Some of the press articles still try to villainize hedge fund manager John Paulson for the tremendous success he has had in the capital markets, particularly since he is focused on gold and it has had a rough start to the year.
Opportunities
- Harmony Gold and Newcrest Mining released their prefeasibility study for the Golpu project in Papua New Guinea mid-week. Both companies’ share prices took a hit on the push back on the development timeline, but for Harmony the growth in the updated resource base will be game changer over time. Harmony’s gold reserves in Papua New Guinea have grown to 42 percent of the company’s total reserves versus 11 percent in the prior year. Earlier this year Harmony sold its Evander operations in South Africa, further reducing its exposure to South Africa.
- Gold smuggling in India may be up as much as 10-fold based on seizures of undeclared gold coming into the country at airports. The rise in the import duty on gold from 2 percent to 4 percent earlier this year has evidently not stymied the desire to acquire gold in India. Weakness in the rupee has sent the local gold price to new highs, which typically would soften the demand for gold in anticipation of a pull-back, but demand still appears to be strong.
- Not only has shorting gold bullion been a popular trade by the fast money players but so has shorting the gold stocks. This has become a crowed trade and of course all good things must come to an end. In the case of Dundee Precious Metals, the short interest has reached such an extreme that it would take nearly 51 days of average trading volume to close out the short positions. Let the wailing and gnashing of teeth begin for the short sellers as the gold price rises higher.
Threats
- Some are cautioning that the silver mining stocks have risen too much in the recent rally and are due for a correction in the short term. It is true the silver stocks have been star performers but historically silver stocks have exhibited as much as a three- times beta to the gold stocks. We haven’t seen much talk that the gold stocks are overdone yet.
- The dollar has drifted steadily lower over the month of August and now within a couple percent of crossing below its 200-day moving average. This could be a technical support level which some traders might try to defend, considering the political backdrop to keep America strong, and could be a testing point to see if the gold price can go higher.
- The next Fed meeting on September 12-13 may be the last time the Fed can announce any new measures to shore up the economy, without looking too partisan in its bias, and could be an important test for new legs in the gold price. Given that Romney has said that he will fire Bernanke if he is elected, we will see how badly the Fed Chairman would like to keep his job.
