Gold Market Radar (October 1, 2012)
For the week, spot gold closed at $1,772.10 down $1.00 per ounce, or 0.06 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 2.01 percent. The U.S. Trade-Weighted Dollar Index gained 0.76 percent for the week.
Strengths
- Gold prices continued to remain firm over the last couple of weeks.
- Gold stocks, on average, lost a little ground over the past week but pretty much are at the same levels as two weeks ago. The important point is that the strong march upward was not followed by an equally strong reversal in prices.
- Central banks continue to buy gold to supplement their reserve base. Ross Norman, CEO of brokerage firm Sharps Pixley, noted that banks are clearly concerned about bolstering their reserves with asset classes that maintain their value in the long run.
Weaknesses
- South African gold mining shares traded lower than their North American peers over the course of the week.
- Strikes at Gold Field and Anglogold shut down as much as 39 percent of the country’s capacity. Angolgold noted there were work stoppages at all of their operations. Harmony Gold remained unaffected by the strikes.
- Higher wages and strike-related downtime are likely to depress the margins for the South African gold miners.
Opportunities
- Klondex Mines reported a drill intercept which carried 2,910 gram/ton (85 ounces/ton) over a 1.5 meter at their high-grade Fire Creek project in Nevada over the past week.
- In addition, earlier this month Paul Andre Huet joined Klondex Mines as its new President and CEO. Huet brings 25 years of high-grade, narrow-vein gold mining experience to the table for Klondex. Previously Huet led the team which built and permitted the Hollister Mine and was Mine Manager at Newmont’s Midas mine, both of which are in Nevada.
- While North American gold producers have been reluctant to buy their junior peers at greatly reduced prices, the Chinese gold producers have been on a shopping spree. Zhongrun announced plans to buy a 42 percent stake in Noble Minerals which has a gold mine in Ghana that is expected to recapitalize the operations to produce 150,000 ounces per year. Shandong Gold also announced plans to buy a 51 percent stake in Australia’s Focus Minerals, Zinjin Mining bought Norton Gold Fields, and China National Gold is in talks to buy a stake in African Barrick.
Threats
- While we have had a strong move in the gold price, two things are missing – China and India. Gold demand in India has plunged due to a weaker currency, slower economic growth and higher taxes. Chinese demand in the second quarter was 145 tons, down 43 percent from the first quarter. The slide in the Shanghai Stock Exchange Composite Index continued into the third quarter with the index hitting three-year lows. The return of these two players to the market should give gold a meaningful lift in prices but we need to see an improvement in their growth prospects.
- South Africa remains challenged by the labor strife. Junior mining companies and new IPOs will likely be challenged to raise new funds to further their development in the near term.
- Earnings reporting season for the gold stocks will start in October but with the dip in prices early in the quarter and subsequent rebound, we may not see meaningful quarter-over-quarter growth metrics. In addition, with the completion of the third quarter and the rise in prices into the quarter end, we may see some profit taking in early October. Don’t get too bearish though, the governments around the world are just warming up the printing presses.
