Gold Market Radar (May 27, 2013)

Gold Market Radar (May 27, 2013)

For the week, spot gold closed at $1,386.65, up $27.10 per ounce, or 1.99 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 4.14 percent. The U.S. Trade-Weighted Dollar Index lost 0.73 percent for the week.

Strengths

• Continuing with the theme of skyrocketing physical demand for gold, the World Gold Council provided updated statistics on gold coin and bar consumption around the world. The data is very encouraging despite the fact that it was calculated for the first quarter of 2013 and ahead of the large price drop in April which spurred the latest rally in physical gold demand. Regardless, demand in India rose 52 percent year-over-year in complete disregard for the import duty hikes imposed in January. The U.S. demand remains below the five-year average, but significantly above last year’s 14.1 million tons, mainly on renewed appetite for American Eagle coins. Investment demand in China increased as expected, while demand from Middle Eastern nations was relatively flat. Surprisingly, Thailand rose to the third spot among coin and bar buyers, while Europe was the only major region to reduce its purchases, reflecting some of the tail risk resulting from the sovereign debt story.

• The University of Texas Investment Management Co., the second-largest college endowment fund with assets under management of approximately $29.5 billion, is sitting on approximately $300 million in gold-related investments, according to the Wall Street Journal. Despite the recent weakness, the endowment continues to like gold and is considering increasing its position in the event of a pullback. According to the fund’s manager, the company is not worried about the recent volatility, as it considers itself a long-time holder rather than a day trader.  The company values the hedging properties of its gold-related investments and will consider exiting its position if as the Fed’s quantitative easing program is discontinued.

• Detour Gold announced a 17.5 million common share bought deal earlier in the week for gross proceeds of 153 million Canadian dollars. The company intends to use the net proceeds for working capital during the ramp-up of the Detour Lake mine. Similarly, Colossus Minerals announced a bought deal of 15.625 million common shares for gross proceeds of 25 million Canadian dollars this week. The proceeds will be used to fund development expenditures on the Serra Pelada project, and for working capital and general corporate purposes. It appears the Canadian capital markets have started to see a more steady flow of bought deals, which helps reiterate the fact that junior miners are trading at extremely discounted valuations.

Weaknesses

• The release of some high profile hedge fund 13F filings revealed that noted hedge fund legends such as David Einhorn and George Soros held sizable stakes in gold-related investments. However, their largest gold weightings were assigned to gold mining ETFs, which are a convenient product – they contain the largest and most liquid stocks – but offer exposure without regard to quality of the companies. It is unfortunate some investors have resorted to ETFs versus buying into a gold mutual fund which is actively managed to select gold companies believed to possess the best investment fundamentals.

• Chile's environmental regulator has stopped construction and imposed sanctions on Barrick Gold’s Pascua-Lama project, citing serious violations to the environmental permit originally granted to the company. A $16 million fine, the largest allowable under Chilean law, has been imposed on the company. News media reports the company acknowledged that it failed to build systems for containing contaminated water. The company is said to be exploring an alternative mine plan that would enable it to mine the resource from a smaller pit on the Argentine side of the deposit.

• Goldcorp, the world’s biggest producer of the metal by market value, will be forced to renegotiate its rental agreement at its biggest mine in Zacatecas, a Mexican court ruled. The court invalidated Goldcorp’s temporary lease agreement as local farmers seek to regain control of about 1,483 acres within the Penasquito open mine land area. The increase in leasing payments demanded by locals appears negligible, and the company is focused on reaching a settlement that will allow it to minimize disruptions to its operations.

Opportunities

• David Rosenberg of Stifel Nicholaus noted in his commentary how the gold-silver ratio has risen to its highest point since August 2010, a level that has previously signaled an up and coming risk-off trade. The risk-off trade normally has the gold-silver ratio and the S&P 500 converging, which would mean a significant rise in the price of gold, a significant correction in the S&P 500, or both. Furthermore, Rosenberg commented he feels nervous about the market when reading news headlines such as: With Stocks This Hot, Why Worry? He eloquently argues this is the perfect cue to begin to worry as it is the usual confirmation of a bull market falling into complacency.

• This week Sprott shared an essay from a longtime friend of theirs, Bill Bonner. In the essay, Mr. Bonner interviews Neil Barofsky, the person in charge of the original TARP, the Feds' $700 billion program to rescue the U.S. economy. Mr. Barofsky shared his dissatisfaction with the way the program unfolded, as banks used the funds to repay each other's loans, and reduce the amount of credit available, defeating the purpose of the program. It appears this may be one of the main reasons why inflation has been confined to financial assets, and not spread to real assets.

• Moody’s Investors Service said U.S. policy makers must address debt concerns seriously if they want to avoid a credit-rating downgrade this year. “More needs to be done on the policy front to address this rising debt ratio,” said Steven Hess, a senior vice president at New York-based Moody’s. The ratio of debt to GDP is set to increase in the long term, according to a recent study led by the Congressional Budget Office. The wake up call for U.S. policy makers in Washington D.C. should bode well for gold prices as it brings back attention to the deficient efforts to balance the fiscal budget.

Threats

• An article on last weekend’s Barron’s by Randall Forsyth caught our interest as it looked into some of the suspicious selling that has been taking place in the gold market. According to Forsyth, there were reports of very heavy buying of put options in the SPDR Gold Shares ETF (GLD). The curious thing is that these options expired on Friday and had a strike price of 132. That option, which was set to expire out of the money—and thus be worthless—wound up solidly in the money after two selling transactions of 17 tons of gold dropped the GLD price to 131.07 at the closing. Forsyth agrees that a large portion of gold investors are suspicious in nature, but this event is too coincidental to ignore.

• A report issued by the Congressional Budget Office states President Obama vastly overstated the spending cuts and deficit reduction his budget plan would produce, while considerably undercounting the level of tax hikes the program would entail. Obama said his program would reduce deficits by almost $2 trillion in a balanced and responsible way. The CBO however finds that Obama’s budget will reduce deficits by only $1.1 trillion in the short term, and forecasts annual deficits would start to rise again after 2017. Despite the media coverage and numerous promises, it looks like the U.S. is nowhere near solving its fiscal budget imbalance problems.

• Investors who dumped shares of gold bullion ETFs amid the April selloff may be in for a shock as capital gains taxes for precious metals are higher than for stocks and bonds. The gains obtained from investments in ETFs that back their shares with physical holdings of precious metals face taxes as high as 28 percent. This is the rate the IRS traditionally applies to items such as coins, art, silver and gold. Gains on stock and bond investments are traditionally taxed at a maximum 20 percent. This should not discourage long-term gold and precious metal investors, to whom it is recommended they hold their bullion investments in a tax-free individual retirement account or other non-taxable account, whenever possible.