Gold Market Radar (February 4, 2013)
For the week, spot gold closed at $1,658.95, down $25.35 per ounce, or 1.82 or percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 6.86 percent. The U.S. Trade-Weighted Dollar Index gained 0.24 percent for the week.
Strengths
• Peak gold has been a topic recently in the media as the senior gold miners find it difficult to grow. The U.S. Geological Survey recently reported that U.S. mines produced 230 metric tons of gold in 2012, down from 234 metric tons in 2011. Similarly, silver production was down to 1,050 tons in 2012 from 1,120 tons in 2011. Lower gold and silver production should ultimately lead to higher prices.
• The sentiment towards the junior mining stocks at the Mineral Exploration Roundup conference which just finished in Vancouver was bleak. Veteran financiers of the junior miners commented they have never seen it this bad. From a contrarian viewpoint this is a positive. We have heard gold fund redemptions have been much worse for our Canadian peers who been forced to sell stocks at rock bottom prices.
• Progress has been made by troops from France and African nations in their effort to oust al Qaeda-linked rebels from Mali’s north. French-led air and ground strikes against rebel positions in central and northern Mali have regained control over a number of villages previously controlled by the rebels. This is positive for miners, such as Randgold which has a substantial part of their assets located within Mali.
Weaknesses
• Global gold holdings in exchange-traded products are poised for the biggest monthly decline in more than a year as the global economic recovery has curbed demand for the metal. Assets had contracted 0.8 percent going into the end of January, the largest decrease since December 2011. For just the largest U.S. listed gold trust, assets fell 1.7 percent in January.
• While accelerated silver coin purchases in January from the U.S. Mint caused a sellout of production before month’s end, the same momentum may not extend into February as some of the demand can be attributed to coin dealers looking to replenish inventories of newly minted coins.
• India’s gold imports soared by 15 percent to 75 tonnes in January as bullion traders across the country were rushing to buy gold before the import duties on gold imports were kicked up by 50 percent from 4 to 6 percent on January 21. This had the effect of taking away a lot of physical demand for the metal in the last 10 days of the month and hence lower prices prevailed.
Opportunities
• J.P. Morgan’s recent 2013 Gold Industry Report sees further gold price consolidation supported by further upside from monetary stimulus in the U.S., Japan and Europe. They expect gold to trade toward $1,800/oz by mid-year. Polymetal’s CEO, Vitaly Nesis, noted that gold prices may even rise to above $2,000 as investment demand from central banks continues to be robust. Thomson Reuters GFMS estimates central banks’ gold purchases increased 17 percent to 536 metric tons last year, the most in 48 years.
• The pickup in economic activity and industrial demand in China and the U.S. gives silver a solid footing in 2013. Demand for physical silver for industrial use could approach record levels in 2013. Silver producing stocks beat the senior gold miners in price performance this week.
• Noted market historian, Don Coxe pulled in the reins from his weekly conference calls and monthly research piece Basic Point with the close of 2012. His last comment on the gold space was, “The rapid expansion of the monetary base by the Federal Reserve, the expansionary policies of the European Central Bank, and the impending yen flooding by the Bank of Japan makes it almost impossible to conceive a more bullish long term environment for gold. Good gold stocks should be the core investment for almost any long term oriented portfolio.”
Threats
• Credit Suisse’s Fixed Income Research considers it not surprising that demand for gold increased substantially during the tumultuous financial markets of the last five years. However, in 2013 the acute phase of the crisis has likely passed, together with the fear trade. With global growth improving and inflation contained, the downside risks are building for gold and the 2011 gold high could prove to have been the peak for the U.S. gold price in this cycle.
• A sharp decline in gold production has been looming for many years on senior gold miners. Few large deposits have been discovered in recent years making it impossible to sustain current production rates. Undeniably, lower production rates in the near future will lead senior producers to intensify their efforts to secure high quality assets. However, asset sizes will likely remain too small to stave off production declines.
• Junior companies with high grade lower capital expenditures should benefit from this scenario but those junior tiered companies that have a business model of gathering large tonnage low grade deposits which require significant capital may find themselves at the end of the line.
