Gold Market Radar (October 29, 2012)

Gold Market Radar (October 29, 2012)

For the week, spot gold closed at $1,711.30, down $10.45 per ounce, or -0.61 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 0.89 percent. The U.S. Trade-Weighted Dollar Index gained 0.48 percent for the week.

Strengths

• Agnico-Eagle and Goldcorp reported strong third-quarter performance. Agnico-Eagle improved operations at the Meadowbank, Kittila and Pinos Altos mines, and as a result, the company increased its full-year gold production from 975,000 ounces of gold to 1,025,000 ounces. Scotiabank analyst Tonya Jakusconek observed, “Agnico-Eagle delivered three consecutive quarters of solid operating performance, and has kept conservative production targets for the last quarter of 2012.” Goldcorp beat analysts’ earnings per share expectations, which helped mitigate the pain of operational challenges during the first half of the year. “This is the sort of thing the market is looking for: under-promise, over-deliver and contain your costs,” George Topping of Stifel Nicolaus told Reuters Thursday. Agnico-Eagle gained 5.62 percent this week and Goldcorp gained 1.08 percent.
• World central banks are buying more gold. Brazil added 1.7 tons in September and Turkey added 6.8 tons. India tends to buy more gold at this time of year because of the jewelry demand for the wedding season and festivals. Central bank buying is expected to continue, given the lower price and currency risk in the developed world.
• The shift out of paper proxies for gold, and into the metal itself, is visible. Total gold coins and bar purchases are up 96 percent since 2009, while net additions to ETFs are down 73 percent over the same period. The shift from paper to physical metal is even more dramatic in silver. Investors have tripled their silver bullion purchases since 2007, while the exchange-traded vehicles sold 26 million ounces more than what they bought to back their funds last year.

Weaknesses

• After eight weeks of consecutive increases, gold’s net speculative length fell last week. Standard Bank attributes gold decline to investor uncertainty over the ability of QE3 to support prices and/or the longevity of the Fed’s open-ended commitment to easing. UBS writes that it makes perfect sense that gold would outperform other risk assets in anticipation of QE, but underperform during the aftermath.
• Harmony Gold lost close to 13,000 ounces of gold to date due to an ongoing illegal strike at its Kusasalethu mine. This equates to around 20 lost production days or 22 million in lost revenue at the current gold price.

Opportunities

• AngloGold Ashanti, Gold Fields and Harmony have signed a deal with unions that will see adjustments to workers’ pay being made under the existing two-year wage agreements as proposed on October 9. Stability in the gold mining industry has been achieved at many operations and there are hopes that this trend will continue.
• The Comstock Lode is a rich silver and gold deposit worked in Nevada mostly in the second half of the 19th century and centered on Virginia City. John Winfield, now chairman of Comstock Mining, started to consolidate the land holdings in the Virginia City area back in 2003 and since then a significant portion (about 10 km long) of the Comstock Lode District has been consolidated into single ownership under Comstock Mining. The first gold and silver pour was achieved towards the end of last month.

Threats

• A deflationary scenario—triggered by slowing world GDP growth—could potentially place downward pressure on gold prices, Mineweb stated this week.  In this scenario, if one assumes the “fear factor” does not overwhelm deflationary concerns, then a possible 30 percent decline, similar to 2008, is at least conceivable.  That would put prices at roughly $1,300.
• UBS observed the relative lack of momentum in current gold prices, pointing out in a note this week that, “It is clear right now gold is lacking the drive to charge higher.”