Gold Market Radar (December 3, 2012)

Gold Market Radar (December 3, 2012)

For the week, spot gold closed at $1,714.80, down $38.20 per ounce, or 2.18 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 2.64 percent. The U.S. Trade-Weighted Dollar Index was essentially flat with just a 0.05 percent rise for the week.

Strengths

• Randgold held its investor day this week to highlight what to expect from the company in 2013. The company highlighted the potential for a substantial reserve increase at Loulo, Gounkoto and Kibali, which support the recently upgraded production target for 2015. The company noted the power situation at Tongon improved substantially, and confirmed that the reliability of the national grid in Cote d’Ivoire has improved significantly and five additional generators for backup power have been added, should there be any disruptions.
• Commissioning at Randgold’s Kibali project in the Congo is on track and on budget, with first ore expected before the end of 2013. Gold production at Kibali is expected to increase by expansion of processing capacity at a “minimal” capex, according to the company. Morgan Stanley commented that Randgold is one of the few gold miners with the track record and capability of delivering volume and growth beyond expectations.
• India’s November gold imports are seen to be coming in higher at 85-100 tons because of festival demand. In addition, according to the Silver Institute’s latest report, industrial demand for silver is expected to rebound in 2013.

Weaknesses

• Gold prices tumbled on Wednesday, resulting from the liquidation of over 1.4 million ounces, which triggered a nearly $25 instantaneous drop in price. In a note to clients, Edel Tully of UBS wrote that it may be more than just a coincidence that Wednesday volumes nearly equaled the January $1,690 and $1,700 put buying that went on through Wednesday. Volumes also matched the increase in CME open interest that occurred in the prior week.
• Tully further commented that she doesn’t think anything has materially changed for gold. Essentially the metal price is back to where it was in the prior week and that level seems to be underpinned by central bank buying of roughly 40 tons at these price levels.
• Sentiment has not been overly bullish as investors want to see the Fed follow through with its announced purchases of more debt.

Opportunities

• Gold Fields will spin off part of its South African business. The newly created Sibanye Gold will be the largest gold mining company is South Africa and will include the Kloof-Driefontein Complex and the Beatrix mines. Gold Fields will keep its second-largest facility—South Deep—and mines in Peru, Ghana and Australia. The re-rating of Gold Fields post the unbundling could be high, due to the removal of the high-cost, deep-level, mature mines from the portfolio. The market has recently rewarded quality vs. quantity. Yamana Gold, with just 1 million ounces of gold producer per year, has a higher market capitalization than AngloGold Ashanti and Gold Fields. Gold Fields will focus on cash flow and dividends as its primary objective. Their shares currently sport a 3.2 percent yield.
• Chinas gold demand will continue to exceed supply in the coming years. China’s Ministry of Industry and Information Technology expects that in 2015 China’s gold demand could exceed 1,000 tons while domestic supply could only reach 450 tons.
• The United States probably won’t avoid a Treasury debt downgrade, which is positive for gold according to Claudia Carpenter from Deutsche Bank. Events during August 2011, when United States Treasury debt was downgraded, proved to be bullish for gold prices.

Threats

• Ivory’s Coast parliamentary Economic and Financial Affairs Commission approved a tax on gold mining companies’ profit as the West African nation seeks to earn more from precious metals production.
• The tax will be 9 percent to 19 percent on profit above an average production cost, which was calculated at $615 an ounce in the first quarter of 2012. Note that Ivorian officials are using “cash cost” metrics, a relic term that was coined when almost no gold mining companies made a profit when prices were low in prior decades, to make it look like the company was producing gold at less than the selling price of gold. If gold companies market that they are producing gold for $615 per ounce and the selling price is $1,700, then from the government’s perspective, the company seems to be booking windfall profits at the expense of the state.
• The Ivorian government will earn 44.3 billion CFA francs ($87 million) in revenue from gold mining this year, more than double the earlier forecast of 21 billion francs and the government obviously wants more.