Gold Market Radar (November 5, 2012)
For the week, spot gold closed at $1,678.10, down $33.20 per ounce, or -1.94 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 2.79 percent. The U.S. Trade-Weighted Dollar Index gained 0.66 percent for the week.
Strengths
- A survey by Bloomberg released on Friday showed gold traders are the most bullish in 10 weeks as 18 of 27 participants expect the price to rise next week. Flows into gold ETF funds have climbed to a new record of just over 83 million ounces. ETF investors have not shown any signs of liquidating recent purchases.
- The past two-week price decline in gold was more speculative than fundamental. The net long position of the speculators declined sharply by nearly 3.2 million ounces in the recent two-week period. Gold bullion tends to weaken on a seasonal basis towards the end of October and then pick back up in November, which historically is the third best month of the year for price gains in gold.
- German politicians, as well as Germany’s federal Court of Auditors, have requested that the Bundesbank check up on Germany’s gold reserves as the metal is viewed more and more as a stable reserve base asset. Germany is believed to have 3,396 tons of gold, the second largest gold reserves in the world after the United States, with the majority of Germany’s gold reserves stored in offshore banks; some two-thirds are being kept in the vaults of the U.S. Federal Reserve. The Bundesbank will make arrangements to repatriate some of the country’s gold reserves and test the gold for purity. It has agreed to ship 150 tons of gold currently stored in New York Federal Reserves to Germany over a three-year period. Once in Germany, gold will be melted down entirely to test the overall purity before being re-cast into standard gold bars.
Weaknesses
- Gold prices fell hard on Friday, the most in four months, on a better than expected U.S. payrolls report and an upwardly revised employment number for the prior month. Some speculate that the Fed would be inclined to end their easy money policy. With a presidential election just days away, it is thought that an Obama win will be positive for gold as the same polices will remain in place. A Romney win could be less positive for gold as Fed leadership could be changed. In the chart below we have overlain the change in the price of gold versus the expansion in the Fed’s balance sheet. Robert Perli of International Strategy and Investment suggested in their recent Weekly Economic Report that the Fed may shift its $40 billion a month Operation Twist spending allowance that is set to expire in December over as a supplement to their $45 billion a month Quantitative Easing program. The ramifications for a rising gold price are obvious. Considering the campaign promises made to voters, it will be very difficult for either Obama or Romney to work through the mountain of debt that has been racked up by the government; printing more money is still in the cards.
- The World Gold Council reported that India’s gold imports in the second quarter plunged over 56 percent to 131 tones. A recent bright spot though was that the Gujarat region gold imports increased as this state got its first gold temple in May this year. Gujarat has imported 23.7 tonnes of the precious metal in the month to October 25, as compared to 12.7 in September.
- Shares of Centamin PLC slumped after a court ruling to annul the company’s 18-year old gold mining contract with the government. Centamin fell as much as 59 percent in London. Egyptian presidential spokesman Yasser Ali in a statement published by website run by the Muslim Brotherhood; the group that propelled President Mohamed Mursi to power; said “the government will deal with this issue accordingly to the public interest.” The bottom line is that tourism dollars have dropped to zero in Egypt and when government officials see Centamin’s revenue stream for gold sales and look at the paltry amount of taxes they have collected from this gold mine, they conclude “that’s not right.”
Opportunities
- Companies producing silver have been performing better recently for a couple reasons and may have further to rise. The Royal Canadian Mint announced Monday it will make an initial public offering of C$100 million in silver exchange-traded receipts. The Mint will offer exchange traded receipts, priced at $20 each, which can be redeemed for silver or cash. This brings a new round of silver buying into the market in the coming weeks.
- In addition, investors in China are seeking out silver as an alternative value investment. Jewelry sales in China rose 19.3 percent for the first eight months of 2012 versus the same period in 2011. Demand for silver is set to jump as much as 10 percent in 2013 according to research from Beijing Antaike. Besides investor demand, another catalyst for higher prices could come from China’s solar industry as the government is targeting 21 gigawatts of solar power installations by 2015 compared to an installation of just 2.6 gigawatts in 2011.
- Along with other central banks around the world buying gold to hedge against currency debasement in the U.S., Turkey is working hard to get privately held gold into its financial system. Turkey wants to bring an estimated $302 billion of hidden gold into the economy to help ease the nation’s current account deficit, which is only second to the U.S., and is making good progress on this front. According to Turkey’s central bank, gold-based deposit accounts have surged 15 percent this year through the end of July, three times the increase in standard savings accounts. Customers in turn can borrow against the deposit and the banks have observed there is lower default risk on such loans.
Threats
- The Democratic Republic of Congo leaked a draft of the proposed changes to the country’s 10-year old mining code which created a lot of concern for investors. Proposals included state participation in mining projects rising to 35 percent from 5 percent, the 35 percent stake would be acquired for free and could not be diluted, a doubling of royalties, windfall taxes if a project performed better than its feasibility study, and environmental mazes that could cause the company to lose the project. By the end of the week, a government official said these measures would not apply to existing projects. However, we find the draft proposals to be disturbing.
- Ernst & Young has just released its latest Mergers and Acquisitions and Capital Raising in the Metals Mining Sector Report. The most notable statistic is that the 43 percent fall in the overall value of deals done in the first nine months of 2012. Lee Downham from Ernst & Young noted that less activity in 2012 is due to macroeconomic conditions and cost control is a factor now for doing deals. Companies are beginning to rethink growth in production versus growth in profits.
- Gold loan portfolios in India have grown at a staggering rate and commercial banks have millions worth of exposure to gold loan companies. Recently, the Reserve Bank of India has halted bank lending for the purpose of purchasing gold bars, it has now asked banks not to lend for gold in any form. This remains a headwind for gold imports into India.
