Gold Market Radar (April 15, 2013)

Gold Market Radar (April 15, 2013)

For the week, spot gold closed at $1,483.00, down $98.15 per ounce, or 6.21 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, slid 8.22 percent. The U.S. Trade-Weighted Dollar Index lost 0.45 percent for the week.

Strengths

• An official of the Multi Commodities Centre of Dubai announced gold worth roughly $70 billion was traded through the Emirate during 2012, a more than ten-fold increase from the estimated $6 billion traded in 2003. As the city continues to develop its appeal as a major international gold and precious metals trading destination, the city is planning to develop its local and regional banks into bullion banks, focusing on fulfilling the needs of African producers and satisfying strong demand from Indian consumers. We have spoken to several West African gold producers and they confirm that Middle East investors have contacted them directly to procure gold directly from the company
• Timmins Gold reported preliminary production results for the company’s first quarter ended March 31. The company achieved record gold production of 28,328 ounces for the quarter, representing an increase of 31.6 percent over the same period last year, and beating analyst expectations. Luna Gold also announced first-quarter production this week stating its Aurizona gold mine in Brazil achieved production of 17,203 ounces of gold, beating previous guidance of 15,000 to 16,000 ounces. Needless to say, we are delighted to see management deliver on their expectations.
• The Clinton Group, a hedge fund, continues its attempt to oust the board of Stillwater Mining. The group accused the company of losing more than $900 million during the 12-year tenure of Stillwater CEO Frank McAllister. Furthermore, the group wrote in a letter to shareholders that cash costs have doubled while overhead expenses tripled. The group also states that strategic decisions have been ever worse than the operating performance, leading to the conclusion that the board needs to be replaced. Shareholder activism has yielded some positive results over the last months in the energy sector; we see this as the kick start of shareholder activism in the gold and precious metals space.

Weaknesses

• On Wednesday Barrick Gold confirmed construction on the Chilean side of its Pascua Lama mega-deposit had been suspended as the company attempts to satisfy environmental and regulatory requirements of the Chilean authorities. Production at the mine has already faced several delays, and prior to the suspension, it was expected to come into production in the second half of 2014. The project has also seen multiple cost overruns which have increased the project’s required capex to $8 billion. Barrick’s shares hit a 52-week low the day prior to the announcement and were down 8.36 percent at closing on Wednesday. Foolishly, in their marketing materials, Barrick Gold still states that they will produce gold at $0-to-negative “cash cost” at Pascua Lama. It’s no wonder that Argentina and Chile want a bigger piece of the alleged windfall profits to be had.
• Cyprus has agreed to sell part of its gold reserves in an effort to raise €400 million to help finance part of its bailout. The country holds just under 14 tons of the metal as part of its reserves, and at this week’s average prices, the proposal would mean selling roughly 336,000 ounces, or 9.4 long tons. Although we expect this transaction to be made outside of the market and directly with another government(s), any bid to help out a distressed investor will come at a discount. We suspect Friday’s near 4 percent fall in the price of gold confirmed the trade took place.
• Goldman Sachs’ latest commodities research noted that the negative price action in gold, together with better U.S. economic growth expectations, is leading the firm to close its long gold position. As part of its closing, Goldman Sachs has also lowered its 2013 and 2014 year-end targets for gold to $1,450 and $1,270 per ounce, respectively. Not satisfied, the bank has also initiated a short COMEX gold position. According to some analysts, this may in fact turn out to be the best possible news for the price of gold; if you recall Goldman called for $200 per barrel oil when the barrel was trading at $130 per barrel. We all know it took only six months for oil to crash down to $40 per barrel following this announcement.

Opportunities

• Distrust of the Federal Reserve and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver as legal tender, reports Bloomberg’s Municipal Market commentary. Arizona is set to follow Utah which gave free way for the use of bullion as legal tender in 2011. Similar bills are advancing in Kansas and South Carolina. As per the Federal law, the U.S. Constitution bars state law from coining money or making anything except for gold and silver coin tender for payments. We believe this measure, as well as the number of states currently studying it, is testament to the status of gold as currency rather than commodity.
• At our home in Texas, lawmakers are currently considering a measure supported by Governor Rick Perry to “repatriate” Texas’ gold held in New York in order to establish a Texas bullion depository. Should the state take such a step, it would offer sovereign backing for deposits and make buying and storing gold easier, said Jim Rickards, author of “Currency Wars: The Making of the Next Global Crisis.” This move will reinforce our position that gold could be treated like money, for it is a means of transaction and a store of value, perhaps the best of them all.
• Agnico Eagle Mines of Canada made an announcement this week giving details of its participation in a private placement of 10 percent of Sulliden Gold Corp’s common shares. At this time the size of the deal, relative to Agnico Eagle’s size, may appear small; however, we believe this transaction sets a precedent in major producers recognizing the value proposition of junior explorers and developers at current valuations. We also see a new financing avenue to provide an alternative for cash-starved juniors with good assets. Just when the major equity research houses are telling you to sell gold at its lows and chase the 135 percent run up of the S&P 500 as it sets new all-time highs, senior gold companies are now buying the junior gold developers.

Threats

• An initial review of the President Obama’s proposed federal budget revealed the document proposes an Abandon Mine Lands fee to be levied on metallic mines on both public and private lands. Furthermore, the budget proposal aims to create a leasing process, subject to annual rental payments, and a royalty of no less than five percent of gross proceeds on miners operating on federal lands.
• Behre Dolbear released its latest survey, ranking countries with the best mining investment policies. Somewhat surprisingly the U.S. and Papua New Guinea ranked as the countries with the most numerous permitting delays. What is even more worrisome is that countries like Colombia, which have had numerous lengthy permitting delays in the past few years, is ranked in the top five countries with the fewest delays. The survey certainly shows a very miserable picture of the support the mining industry is currently receiving from the public sector around the world.
• ABN AMRO, the largest Dutch bank by assets, sent a letter to its clients this week stating that it had no physical gold available for delivery. Instead, the bank is offering customers a monetary claim at the current market rate for gold. The result is that instead of owning a risk free, physical asset (gold), the bank’s clients now own a monetary claim on ABN AMRO, and are exposed to the bank's credit risk. The key takeaway from this move is that insiders now know that the true value of gold is much higher than that of the market and that it has to be protected at any cost, even at the expense of loyal customers.