Gold Market Radar (November 12, 2012)

Gold Market Radar (November 12, 2012)

For the week, spot gold closed at $1,731.18, up $53.08 per ounce, or 3.16 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.87 percent. The U.S. Trade-Weighted Dollar Index gained 0.58 percent for the week.

Strengths

• Dundee Precious Metals reported strong results for the quarter ending September 30, 2012. Dundee reported adjusted earnings of $18.7 million or $0.15 per share, above consensus earnings of $0.11 per share. Third-quarter co-product cash costs were reported at $822 per ounce down from $846 per ounce in the second quarter of 2012. For the current year the company expects to achieve the higher end of the production range and lower end of the cost range, pointing to a strong fourth quarter.
• Harmony Gold Mining, the third-largest producer of gold, said that profits in the latest quarter jumped almost fivefold as output and prices increased. Chief Executive Officer Graham Briggs plans to raise production to 1.7 million ounces in fiscal 2016 from an estimated 1.3 million ounces this fiscal year. Harmony gained 8.4 percent this week.
• Gold imports by China from Hong Kong climbed 30 percent in September from a month earlier as central banks across the world took steps to prop up their economies, boosting demand for bullion as a haven. Mainland China bought 69,712 kilograms of gold including scrap and coins, compared to 53,508 kilograms in August. Gold is in the 12th year of a bull run as investors seek to hedge against weaker currencies and the threat of rising consumer prices.

Weaknesses

• In his November market commentary, Marc Faber concludes that equities could easily decline by 20 percent (or even more) from the recent highs. Investors who are heavily invested should raise some cash and hold the U.S. dollar. A strong dollar might suggest a weaker gold price, based on the negative gold-to-dollar correlation.
• Marc Faber is accumulating gold gradually, but also he is mindful that a more meaningful correction could lie ahead.
• On November 5, “Gold not only has broken a number of support levels, but it has also broken down from a bear flag,” analyst Karen Jones and Axel Rudolph from Commerzbank AG reported. They suggested that gold might fall to $1,631.

Opportunities

• Don Cox, Global Portfolio Strategist at BMO, believes an Obama win should be good for gold. Obama runs a deficit of over a trillion a year and his only proposal for reducing the deficit going forward is to tax 1 percent of rich people, which might raise as much as $500 billion over the next decade but that won’t be enough. “So what we are going to have is more of the same” (printing money) says Don Cox. He also believes that gold stocks will outperform the underlying precious metals. Looking back at history, gold has consistently performed better in a sitting president’s second term.
• Shandong Gold Group, Zijin Mining Group and Zhaojin Mining Industry, China’s biggest gold companies, are looking for overseas acquisitions as bullion prices rise. During a mining conference in Tianjin, Li Zhongyi, chairman of the international mining unit at Shandong Gold, said “mines worth $1 billion would fit our plan. We prefer mines which are already in production.” Chen Jinghe, chairman of Zijin Mining, said in a separate interview that “our development would be very limited if we don’t expand overseas because China is lacking gold mines.”
• UBS believes gold buying in India will be stronger in the fourth quarter compared to the previous three months. According to Edel Tully, a London based analyst, performance is already higher by 5 percent compared with the first two months of the third quarter, and compared with the same period in the fourth quarter of 2011. She expects the seasonal trend to continue playing out for the remainder of the year.

Threats

• Twelve of the world’s largest gold mining companies presented at RBC’s annual gold mining conference in London. The main issues for both the CEOs and investors were the perception of worldwide growth in resources nationalism, a trend towards higher tax and royalty rates, and higher rates of local participation.
• Marc Faber of Gloom Doom and Boom newsletter fame told Bloomberg TV, “I am surprised with the re-election of Mr. Obama. The S&P is only down like 30 points. I would have thought that the market on his re-election should be down at least 50 percent… I think Obama is a disaster for business and a disaster for the Unites States. Mr. Obama doesn’t care about piling up debt.”
• Faber concluded, if the U.S. does go into recession -- or moves into a deeper recession—this could also impact the gold price negatively, at least initially.