Gold Market Radar (May 6, 2013)
For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.
Strengths
- For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.
- INK Research reports insider buying on the TSX Venture exchange is nearing record highs, led by the mining sector. The company’s proprietary insider buying indicator hit 715 percent, meaning there are seven stocks with insider buying for each stock with insider selling. The recent surge bodes well for mining junior stocks as the insider buying indicator correctly foreshadowed the recovery in prices following the 2008 crash says David Kwan of Salman Partners. It appears physical gold buyers are not the only gold bulls in the market today.
- During a recent panel discussion David Franklin of Sprott and Frank Holmes discussed the recent sell off in gold and agreed that gold sentiment has bifurcated with financial buyers reducing their allocation to gold while physical investors have increased their purchases. As a result, Frank stated that as uneducated buyers get shaken out of the market, and educated buyers jump in gold, ownership is effectively transferred from weak hands to strong hands.
Weaknesses
- Evy Hambro, manager of BlackRock’s commodities funds was very critical of recent gold stocks performance at a private event in London this week. Hambro placed the blame on poor execution on the part of managers, and noted their poor job at delivering value to shareholders. These comments are not new, but they do serve to remind investors of the difficulty in picking the best stocks among an industry with rapid rising costs, recent weak pricing, and high execution risk.
- The reporting season started with some previous underperformers confirming their status. Newmont Mining disappointed with its high costs and lower grades which make its full year cost guidance now difficult to achieve. Goldcorp also battled lower grades as it announced lower by-product numbers at Penasquito. Kinross anticipated its reporting to announce its widely expected prefeasibility study of Tasiast. The project has only an 11 percent internal rate of return at $1,500 dollar gold. No sensitivities were given to see what could happen in a bad pricing scenario to a project that has already seen multi-billion dollar write-downs. And lastly, George Topping of Stifel Nicolaus shared the news that Barrick/Goldcorp's gold exports from Pueblo Viejo in Dominican Republic apparently have been halted againas the companies are reportedly required to pay an unsubstantiated and unlikely $992 million in fines and penalties.
- New Gold Inc. reported weak earnings this week. The company missed earnings and production guidance based on lower than expected production from its New Afton mine as low grade open pit waste material had to be removed to reach the high grade ore. The company also reported lower production at CSP and Mesquite based on lower grades at the leach pads.
Opportunities
- A symbolic change in sentiment happened this week as Allied Nevada was able to complete a bought deal this week led by Dundee Securities. Dundee Securities President Ned Goodman is a widely respected in the mining industry and his company stepped up and raised equity for a gold company amid negative investor sentiment. The deal, valued at $150 million is by no means small, and demonstrates capital markets are healthier than initially thought; at least in the presence of strong leadership with a proven record of success.
- The Arizona State Senate approved legislation to make gold and silver coins legal tender in the state. The bill was eventually vetoed by the Governor who cited the lack of coordination with Federal agencies tasked with overseeing these transactions for her inability to pass the legislation. Despite this fact, it has become evident there is a lack of confidence in the monetary system. The push to establish gold as currency in the United States has become increasingly popular, with more than ten states currently drafting similar legislation.
- The addition of two words to the latest Federal Open Market Committee communication issued on Wednesday has given us more reasons to believe the Fed is not likely to taper purchases as early as some economists anticipate. The sentence now reads that not only is the Fed ready to reduce asset purchases when it deems it necessary, it is now also ready to increase those purchases to maintain appropriate policy accommodation. The correlation between the size of the Fed’s balance sheet and the price of gold continues to be strong despite a recent divergence. Further easing, even the sole possibility of it, should bode well for gold prices.
Threats
- Dundee Capital Markets studied the three-year annualized percent increase in per tonne costs for 99 mines around the world. The results are staggering; their estimates talk of a median annualized rate of cost inflation of 11 percent over the last three years. It is evident mining cost inflation is widespread, but when comparing these costs with a 2 percent annual CPI, one can conclude costs are out of control. With gold prices showing weakness in recent months, margin compression is a genuine threat for those companies that cannot control their cost inflation.
- Dundee Capital Markets also looked at the recent developments that have changed the fiscal risk panorama for both seniors and juniors in the space. The regulatory instability of developing countries is not at all surprising, with at least eight documented cases of added fiscal pressure to miners. Countries such as Ghana, Romania, Senegal, and Armenia among others increased or sought to increase royalty payments from miners in the last 12 months. As if these risks were not enough, traditional mining friendly jurisdictions in developed countries have also turned their back on miners recently. Australia’s super profits tax, Nevada’s proposed changes to royalty rates, and Quebec’s potential windfall tax, and Mexico’s recently discussed new royalty system are only a few of the frontal attacks miners have been subject to in recent months.
- Financial media outlets have convinced investors that the gold sell off in mid April is broad based and that gold has lost its fundamental value. An interesting report was published this week in which it became evident that only a few players have parted with their physical gold in the last three months. What is most interesting is the fact that JP Morgan accounts for 99.3 percent of the gold delivered in the Comex market since February 1. This is the same bank that was investigated in connection with a possible silver price manipulation after whistleblowers alerted the Commodities Futures Trading Commission in November 2009. Back then it was speculated that the bank was acting as an agent of the Federal Reserve, holding down the price of silver, to buoy confidence in the U.S. dollar.
