Gold Market Radar (February 18, 2013)

Gold Market Radar (February 18, 2013)

For the week, spot gold closed at $1,610.10, down $57.10 per ounce, or 3.42 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 5.73 percent. The U.S. Trade-Weighted Dollar Index gained 0.28 percent for the week.

Strengths

• The Kusasalethu gold mine in South Africa will re-open following a sustained period of labor unrest. Harmony Gold, the owner of Kusasalethu, set a strong precedent when deciding to shut down the operation rather than agreeing to labor demands. It is the first time a company has taken a stand and closed a profitable operation in South Africa, as well as the first time in five years that a mining company has dictated the return-to-work conditions as opposed to employees and unions.
• DRDGOLD declared an interim dividend this week following a period of lower operating costs and higher Rand gold prices. Furthermore, the company announced it is targeting a 4 percent dividend yield, together with a 30 percent payout ratio.
• Coeur d’Alene Mines, the Idaho-based silver and gold producer, has made a tender offer for Orko Silver valued at $379 million. The offer comes on the back of a First Majestic Silver bid for Orko Silver. We believe it is significant that we are now seeing counterbids coming into play to acquire cheap assets.

Weaknesses

• With Chinese markets closed for the week for New Year celebrations, gold prices were on a slippery footing for the most part. This weakness was further exacerbated on Friday when filings for Soros Fund Management and Moore Capital showed that both players had sold a significant amount of their U.S.-held ETF gold investments in the fourth quarter. However, with Soros being an astute investor in the currency markets, it is not inconceivable that he swapped his U.S. dollar-based gold holding into gold denominated in yen. Over the last six months, gold is flat in dollar terms but in yen terms is up almost 19 percent, with the price breakaway starting in the fourth quarter.
• San Gold is set to raise 50 million Canadian dollars through the sale of convertible unsecured subordinated debentures on a bought-deal basis early next month. The news comes after the company lost 53 percent of its market cap year to date, and on the back of its February 8 announcement of failing to meet gold operation guidance.
• Avocet Mining provided a resource update outlining the new test work done at its Inata mine in Burkina Faso. The study indicated the resource is more complex than previously estimated, leading to a new reserve estimation of roughly half of the previous guidance. As a result of the current cash restrictions and financial standing of the company, Avocet has announced it needs to restructure its arrangements to remain viable. The share price fell more than 50 percent on the news.

Opportunities

• David Zervos of Jefferies noted that the quick and steady rise of the euro in terms of yen that we have seen in the last few weeks led the ECB to fire its first shot in this year’s increasingly violent currency war. The key takeaway from this move is to remember that all of the largest central banks in the world are now in monetary easing mode (read: printing money) to sustain the economic recovery. In these turbulent circumstances, investors must seek ways to isolate themselves from currency devaluation. Commodities in general, and gold specifically, are the direct ways to hide from this war.
• Russian president Vladimir Putin continues to turn his black gold into bullion. After turning Russia into the world’s largest oil producer, Mr. Putin has turned the country into the biggest gold buyer. His claims of the U.S. endangering the world economy by abusing its dollar monopoly have led Russia to seek safety in gold. The country added 570 metric tons of gold in the last decade, beating runner-up China by almost 150 metric tons. Gold has risen almost 400 percent since Putin’s purchases.
• Building into sovereign purchases of bullion, Christopher Wood of CLSA noted in his latest article that central banks bought a net 145 tons of gold in Q4 2012. Furthermore, central banks across the world purchased a whopping 535 tons of gold in 2012, making it the year with the biggest official demand for the metal since 1964.

Threats

• Gold has also been under threat due to speculation that the Fed will end asset purchases well before the end of 2013. Currently the Fed is buying $85 billion per month and if that pace continues, it would be buying 60 percent of net Treasury issuance this year. Bank of America Merrill Lynch expects the Fed to continue buying well into 2014, as the sequestering of spending could take 0.5 percent off the U.S. GDP in 2013.
• Heavy short-selling of gold in the past few days has revealed the size of current short positions on bullion. According to Standard Bank, total short positions in gold amounted to 168.2 tons at the beginning of the week, flying well above the 100.8 tons averaged over the last five years. Gold continues to be the most oversold sector, and the size of the short positions will pose resistance to a price increase.
• Despite the fiat money printing frenzy and indication of the Fed’s balance sheet now surpassing the $3 trillion threshold, consensus opinion is that inflationary pressures will be contained. As noted in Bank of America Merrill Lynch’s latest Bond Breakers commentary, the 2-, 5-, and 10-year-ahead inflation expectations remain well within historical ranges, potentially deferring investors’ move to hard assets.