Gold Market Radar (March 11, 2013)
For the week, spot gold closed at $1,578.80, up $2.57 per ounce, or 0.16 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 0.33 percent. The U.S. Trade-Weighted Dollar Index gained 0.47 percent for the week.
Strengths
- Despite reports of lower than expected shopping over the Chinese New Year, the Chinese government has reported sales of gold bars for investment purposes rose twofold, as compared to last year. Monitored establishments reported sales of gold, silver, and jewelry pieces were up 38.1 percent this season. Even fears of China slowing down cannot dwindle Chinese craving for gold.
- The South Korean Central Bank added 20 metric tons of gold to its international reserves in the month of February arguing a need to diversify its holdings. The transaction value of just over $1 billion is not massive by global standards; however it symbolizes a 24 percent increase in the countries gold reserves. Furthermore, including this recent transaction gold reserves account for only 1.5 percent of the country’s total reserves, thus leaving plenty of room for further “diversification” purchases.
- Fed Chairman Ben Bernanke gave a speech last Friday night in which he reiterated his commitment to QE III, and added that the program’s main purpose is to “prompt a return to the productive risk-taking” essential for economic growth. David Rosenberg of Gluskin Sheff noted on his March 7 “Breakfast with Dave” newsletter that the Fed Chairman is clearly telling investors that being in cash is a money-losing strategy, and that he has the power to maintain this “financial repression” for a long time. To be clear, “financial repression” means a sustained period of negative interest rates even with inflation expectations on the rebound; in such a scenario it is difficult not to make a case for gold as the most effective inflation-hedge.
Weaknesses
- Hedge fund billionaire John Paulson has seen the value of his gold fund drop 26 percent this year on what analysts largely attribute to a hefty levered bet on gold. In a letter addressed to his investors Mr. Paulson stated he continues to believe in the long term outlook for gold thanks to credit expansion in the U.S., continued monetary easing around the world, and significantly discounted gold equities.
- Declines in ETF gold holdings have continued to decrease thanks to liquidations and rotation to more cyclical assets. The month of February saw a decline of 3.4 million ounces in ETF holdings, the largest on record. The largest factor contributing to the decline is the growing sentiment that monetary tightening could occur earlier than expected. Yet, according to Russ Koesterich, BlackRock’s global Chief Investment Strategist, this is an attractive point of entry for many investors given speculative positioning in gold futures is now at 2008-end levels.
- According to the Financial Post of Canada, up until this week the nearly 700 TSX Venture mining companies combined have raised only $110 million this year. Capital has flown out of the sector leaving some juniors with market values below the cash on their balance sheet. A light at the end of the tunnel may still shine for those juniors with good assets; during a recent interview at the Prospectors and Developers Annual Conference (PDAC) with Mark Bristow, Randgold’s CEO, he acknowledged exploration companies are struggling to access capital and stated Randgold is currently looking for opportunities to sign joint ventures with exploration companies.
Opportunities
- The gold price has gone sideways for the past two years with Operation Twist recycling maturing short-term securities into longer dated bonds to lower long-term interest rates without expanding the Fed’s balance sheet. Since the policy shift to purchase $85 billion worth of bonds per month, gold has not seen any traction towards higher prices with new all-time highs being attained in the broader market indexes as investors chase performance.
- Investor sentiment towards gold stocks, as tracked by StockCharts.com, the Gold Miners Bullish Percent Index has plummeted to just 3.33 percent. From a contrarian viewpoint now may be one of the best times in the past two years to add gold stocks to your portfolio with pessimism at an extreme as certain investment funds are liquidating their gold stocks at the bottom.
- Bain & Capital has published a recent study in which it forecasts a “super abundance of capital” between now and the year 2020. The rationale is that financial assets are close to reaching a ratio of 10:1 when compared to global GDP. The result will be a world with too much capital chasing too few goods, which will inevitably lead to an increase in the frequency, intensity, size and longevity of asset bubbles. Central Banks will be in a position where they will have to continue easing just to keep assets moving up in price, proof of which is the recent statement by the Fed assuring investors it is not planning an exit strategy for its treasury holdings. Investors will slowly but surely begin to feel the effects of inflation and will flock to hard assets and inflation hedges.
- China’s mining giants continue growing larger and have recently received consent from the Chinese government to beat the $19.6 billion in mergers they participated in last year. The government is assisting these firms in providing capital at very attractive rates in return for these companies looking for merger and acquisition candidates in natural resource sectors. This move should bode well for junior precious metal explorers and producers currently trading at very cheap valuations as China seeks to increase its gold reserve holdings, currently at 2 percent, compared to 20 percent in the 1990s.
Threats
- Central banks around the world have moderated the pace of monetary intervention as their foreign reserves grew almost 7 percent over the last 12 months. The concept of moderating the easing has found some investors willing to believe the real economy can continue to grow without further intervention. However, as some countries pledge to tame their currency and interest rate interventions, other countries have given assurance their easing will not stop. It is a growth war rather than a currency war in their view, which justifies unlimited intervention. Mark Carney, future governor of the Bank of England was quoted saying the books “aren’t maxed out.”
- Impala Platinum Holdings of South Africa has been notified by the Zimbabwean government that it must cede 51 percent ownership of the company’s local unit to the nation without any compensation. The so called Indigenization laws passed in 2011 dictate all foreign or white owned companies must surrender a controlling stake in their business to the government or to black Zimbabweans. There are numerous South African and global mining companies currently operating in Zimbabwe, and could, at any point, face a similar expropriation.
- The stock market is back to mid 2007 levels. Not only has the Dow broken through its previous peak, current earning per share (EPS) have also matched 2007 levels, as have price to earnings multiples. Most importantly, according to David Rosenberg of Gluskin Sheff in the fourth quarter of 2012 the S&P EPS growth turned negative for the first time since the third quarter of 2007.What some conservative investors see as a strong sell signal appears not to resonate among the investment world. Investors have continued to pile on to the U.S. equity market with a great deal of determination at the cost of gold and gold backed equities.
