Gold Market Radar (April 29, 2013)
For the week, spot gold closed at $1,462.09 up $58.24 per ounce, or 4.15 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.15 percent. The U.S. Trade-Weighted Dollar Index lost 0.30 percent for the week.
Strengths
- On Friday last week, the Chinese Gold & Silver Society in Hong Kong reported it had sold out of all of its spot gold and placed orders to Switzerland four times larger than normal to keep up with demand. On Monday, the U.S. Mint suspended sales of its smallest American Eagle gold coin after it sold off all of its inventory. The surge in gold demand in Turkey is causing delays in coin deliveries by the Istanbul-based mint, while Standard Chartered Plc said its gold shipments to India last week exceeded the previous record by 20 percent.
- Gold is not in a bubble according to Commerzbank’s strategists. Their latest chart plots gold starting in 2002 together with crude oil starting in 1998 and tech stocks from 1990. In their discussion they note that immediately following their record highs, both tech stocks and oil went on a sharp decline. Within nine months, tech stocks had halved in price, while it took only three months for oil to lose half its price. The picture for gold does not resemble these two events; after 19 months from its peak, gold has fallen only about 25 percent. A comparison between the current situation in gold and the former bubbles is superfluous at best, in their opinion.
- Alamos Gold reported its first-quarter 2013 results earlier in the week to the delight of many mining analysts. The company beat analysts’ expectations on both top and bottom line, and grew its production to 55,000 ounces of gold from 40,500 ounces in the same quarter last year. Furthermore, the company is currently boasting an 8.76 percent free cash flow yield. A company with strong free cash flow yield can build its business through paying off debt, making acquisitions, or returning money to shareholders. In this case, the company announced a stock repurchase of 10 percent of its float over the next 12 months. Even though the company trades at a premium to most junior producers, its low cost profile, cash generation and self-funding capabilities, as well as its discipline in returning capital to shareholders fit our growth at a reasonable price (GARP) model rightly.
Weaknesses
- Following the atrocious sell-off in commodities that caused so much market chaos last week, commodity funds lost 1.3 percent of total assets under management to redemptions; precious metals funds alone recorded $2.3 billion in outflows. That is 11 straight weeks of outflows from precious metals funds, the longest streak on record according to BofA Merrill Lynch strategist Michael Hartnett.
- Harmony Gold reported an underground fire at its Phakisa mine which left one employee dead and led to a halt at two operations that account for 19 percent of its output. The last official report stated the cause of the fire is still unknown and the efforts to extinguish the underground blaze are ongoing.
- Technical analysts have resumed the calls on gold to fall further following the price recovery over the last week. It looks like gold has broken below the trend line from the 2008 low in Auerbach Grayson’s modeling. Its belief is that gold can fall to $1,150 based on a purely technical analysis. While we commonly use this type of analysis as part of our investment recommendations, we believe conclusions stemming from these studies must be backed by adequate fundamental analysis. As of late, we believe the majority of the technical analysis commentaries calling for gold falling further do not have convincing fundamental support.
Opportunities
- The Swiss Peoples Party launched an initiative to prevent the Swiss National Bank from selling any of its gold reserves and to force it to hold at least 20 percent of its assets in the precious metal. The initiative has gathered the required 100,000 signatures necessary for a national referendum, the government said last week. At the end of 2012, the SNB’s gold reserves represented around 10 percent of its total assets.
- Barrick Gold’s shareholders openly criticized the firm’s executive compensation arrangements at the company’s annual general meeting in Toronto on Wednesday. The criticism was exacerbated by the board’s decision to pay $17 million to newly appointed co-chairman John Thornton. The company lost more than $10 billion of its market capitalization in 2012 and has lost nearly 50 percent of its market capitalization so far this year. Despite the fact that the compensation vote is non-binding, we welcome this type of shareholder activism and its intention of tackling a problem that has become endemic in the gold mining industry.
- On May 11, the Colombian government will revert to the previous mining code under which most current mining licenses were granted. The move comes as the constitutional court failed to revalidate the new mining code proposed in 2011. The government will now have to decide whether it stays with the old code, which proved friendly to foreign investment and saw exponential growth in the domestic mining industry, or drafts a new code and takes it through the legislative process. While we admit this process will bring some political uncertainty to the sector in the short term, we see an opportunity for the government to allow mining companies to operate under the old code while it drafts a proper, well-documented mining code to be implemented prospectively. The move may also prove vital to unlocking the moratorium on mining licenses the central government has had in place since 2011.
Threats
- U.S. inflation may appear low for historical standards at 1.5 percent, but this is not stopping it from eroding citizens’ real wealth. On Friday, the yields of U.S. Treasuries up to the seven-year term closed below the inflation rate, which is effectively the same as paying the government to accept your loan. This is especially worrisome for savings and pensions that will barely, if at all, struggle to offer positive real returns. But the story is also affecting workers, as the Wall Street Journal reports wages are rising at a rate of 0.5 percent a year, much lower than the pace of inflation. In times like this, investments in hard assets, and especially in gold, could be beneficial for their inflation protection features.
- Political instability has returned to the young nation of Kyrgyzstan as local nationalists threaten to return to the streets to topple yet another government unless Prime Minister Zhantoro Satybaldiyev agrees to expropriate Centerra Gold’s Kumtor gold mine. The nation’s parliament has set a June 1 deadline to renegotiate or repudiate the 2009 agreement under which Centerra is operating the mine. The company currently pays a 14 percent gross revenue royalty to the country, which in 2011 accounted for 12 percent of the country’s GDP. Despite the strong pressures by the nationalists, the office of the Prime Minister remains committed to resolving the issue without dashing the country’s hopes of attracting more foreign direct investment.
- Kitco contributor and leading precious metals commenter David Levenstein notes in his last piece that it has become abundantly clear that the price decline in gold last week was engineered by speculative action on the futures market of Comex. Furthermore, he commented on how this artificial manipulation of paper gold has nothing to do with the physical market, which is skyrocketing. Eventually, this will lead to a major dislocation in the price of the physical and the price of the paper markets, with the risk being that some issuers of paper gold will not be able to deliver the promised bullion.
