Gold Market Radar (June 3, 2013)

Gold Market Radar (June 3, 2013)

For the week, spot gold closed at $1,387.92, down $6.86 per ounce, or .09 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 7.21 percent. The U.S. Trade-Weighted Dollar Index lost 0.45 percent for the week.

Strengths

• A week of weak U.S. economic data eased fears that the Federal Reserve would engage in any sort of tapering program for its monthly $85 billion bond buying program. Furthermore, gold climbed as the dollar index weakened. The rise in spot gold also helped attract attention from generalists and hedge funds that are driving the rise in gold-backed exchange-traded fund holdings for the first time in three weeks.

• Russia is profiting from the weakness in gold prices and has expanded its gold reserves for a seventh straight month in April. Russian bullion holdings are now the seventh largest by country, after they increased to 990 tons. However, sovereign buyers are not the only ones benefiting from the price action created by excessive sell-off last month. In Singapore, home to large communities of Chinese and Indian immigrants, unprecedented physical demand for the metal has drawn down inventories and made supply scarce. Premiums for immediate delivery rose to $7 per ounce, setting new highs.  Premiums in other Asian countries have eased after gold prices bounced off the two-year lows but remain well above their averages.
• Klondex Mines released more recent exploration results this week. All five drill holes intercepted mineralization at its Fire Creek gold project in Nevada. The new mineralization continues to highlight the potential for new discoveries in the unexplored areas of the Fire Creek property. In Bulgaria, home to Dundee Precious Metals’ Chelopech mine, Parliament has elected a new prime minister, ending a three-month stalemate following the resignation of the previous government amid escalating anti-austerity protests. The new government’s task of promoting economic growth should bode well for companies like Dundee.

Weaknesses

• Short sellers in the gold futures market increased their position for the sixth consecutive week lifting the total short position to a new record 14.6 million ounces. Geoff Candy, a Mineweb contributor, notes that despite the extreme bearish attitude by traders toward the yellow metal, analysts believe it could be a good thing for gold. The reason why lies in the fact that heavily oversold positions with record levels of short positions are very unlikely to fall any further. At such a juncture, the margin calls have been made, those bearish on the metal have already sold off or taken short positions, while long term holders of the metal buy the dips. The option for a negative catalyst is virtually non-existent, while the occurrence of a positive catalyst – out of which there are many – could trigger a revaluation that would be intensified by the record number of short covering.

• In a recent interview, Peter Leon of Webber Wentzel noted the mining sector in South Africa is in urgent need of strong leadership, from labor, the miners, and government. The country’s un-addressed social inequality is largely to blame for the seemingly-continuous labor strikes and the demands for unaffordable wage increases. Amid spiraling costs and declining commodity prices, labor instability has certainly become a nationwide problem for the resource dependent economy. The government’s increased involvement has yet to bring a realistic solution to the table, while investors bear the cost.

• Last Friday a Chilean regulatory agency ordered Barrick Gold to halt its $8.5 billion Pascua Lama Project and fined the company $16 million, alleging serious violations of water management at the site. Chile’s environmental regulator was cited this week stating it will likely take at least a year or two for Barrick to reactivate the project given the time required to build the anti-water pollution infrastructure needed.

Opportunities

• This week we dusted off one of our favorite statistical analysis tools at U.S. Global. We study the time certain assets spend above or below their 200 day moving average after crossing the “golden cross” or the “death cross” as it help us understand the assets’ relative strength and complements our other mean reversion models. The study reinforced our belief that gold is in uncharted oversold territory and has to revert upwards, even on a purely statistical analysis. Over the last ten years, when gold meets its “death cross” it spends 71 calendar days on average before reaching a “golden cross”. More importantly, gold falls on average a maximum of 5.7 percent before it troughs. Since gold’s last “death cross” on February 19 this year, 101 calendar days have passed, and gold has fallen a maximum of 19 percent. With these numbers in mind it is evident why we believe gold is due for a correction towards its “golden cross.”

• The price action in the mining sector is starting to show signs of a technical bottom and it is highly likely that we will see additional choppiness before the market finalizes the transition back to a solid uptrend.  Market participants seem to be buying more than selling and the current price appreciation is testing resistance levels established in April and early May.
• The index still has more work to do before the trend has changed, but we haven’t seen price action like this for quite some time.

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• According to a recent Deutsche Bank Research study, central banks of countries covering roughly 27 percent of global GDP have cut rates in recent weeks, highlighting once again the ongoing accommodative bias. Perhaps the most meaningful of these cuts was the 25 basis point slash to the refi rate in the eurozone in early May. To ratify its commitment to increasing liquidity in the system, the German government put aside its intransigent commitment to austerity this week in light of new record unemployment numbers across the continent. Some see the willingness to lend as a potential shock to restart the eurozone economies, however, the reality of the members’ unsustainable deficits will be continue to be ominous and the necessity to diversify into real assets such as gold will be more undeniable.

Threats

• On Thursday, first quarter GDP growth for the U.S. was revised down to 2.4 percent from the previous 2.5 percent. Not a terrible revision by any means, especially given most of the growth components were unchanged from the previous reading. However, details emerged showing after-tax corporate profits decreased 1.9 percent for the quarter. The disappointing number was the first negative reading since the first quarter of 2012 and highlights the big concern in the markets today of stocks grinding higher on the face of stagnated earnings growth. The negative reading is not only a blow to the overly enthusiastic buying seen in the market, but also a worrisome indicator of global economic growth where the U.S. has been the poster child of the developed world.

• On a similar note, David Rosenberg of Gluskin Sheff, cited in his daily note four reasons why investors should be concerned with the current state of the U.S. equity market. Firstly, he argues that the current trailing P/E multiple of 16x appears overly-expanded at levels similar to those that triggered the market correction in April 2010. Secondly, market bullishness hit the 70 percent mark, a level not reached since the exuberance of the 2007 summer. In addition, leverage has reversed its decline with margin debt rising 1.3 percent for the month of April. Lastly, speculative long positions for the S&P have reached near record highs. There may be reason to believe the market is overstretched, yet with the current monetary expansion not expected to be tapered soon, the market may have more upside before it corrects.
• The Reserve Bank of India continue its frontal attack on gold following its futile attempts to reduce imports by increasing the tariffs paid by importers on two separate occasions this year.  The RBI has now banned banks from lending against gold coins weighing more than 50 grams per customer, or for that matter any units of gold exchange-traded funds and gold mutual funds. In addition, the central bank said non-bank financial institutions should not give loans for the purchase of gold in any form. As with the previous attempts at over regulating and forcing demand lower in the bullion market, the RBI will quickly find out these policies are meant to backfire in a country where gold plays a crucial cultural role.