Gold Market Radar (June 10, 2013)

Gold Market Radar (June 10, 2013)

For the week, spot gold closed at $1,381.74, down $6.18 per ounce, or 0.45 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 1.82 percent. The U.S. Trade-Weighted Dollar Index lost 2.05 percent for the week.

Strengths

• Bloomberg contributor Nicholas Larkin reports gold traders are the most bullish since before the bear market began two months ago after a retreat in equities from an almost five-year high and a weakening dollar spurred demand for bullion. In a survey conducted by Bloomberg, 19 analysts reported they expect gold to rise next week, with only eight expecting a drop in prices.
• As a matter of fact, the U.S. dollar showed some pronounced weakness over the course of the week before partially recovering on Friday. Already on Monday the weaker-than-expected ISM numbers sent the dollar index breaking below the 50-day moving average. In addition, the ADP report mid week showed private sector employment numbers are not keeping up with economists’ expectations. Furthermore, our relative strength models show it takes on average 80 days for the dollar to cross above the 50-day moving average. Based on this information, we are at a stage at which the dollar should continue to show weakness, thus setting a base upon which gold prices could recover.

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• Centerra Gold commented this week on a potential restructuring of its operating agreement with the Kyrgyzstan Government. As part of the agreement, the Kyrgyz Government would cease to be a shareholder of the company, and instead would be part of a new Joint Venture that would own and mine the Kumtor deposit. Steven Butler of Canaccord Genuity believes the Kyrgyz Republic would seek to increase its Kumtor ownership percentage to a maximum 45 percent; however, the proposed transaction would only be 4- to 6-percent dilutive for current shareholders. Yet, shareholders would realize greater returns on the exploration and production upside on the assets outside of Kyrgyzstan and would see some relief to the share price, which is currently pricing in major political risk.

Weaknesses

• Geoff Candy at Mineweb reports silver prices may see weakness coming from reduced industrial demand. According to the note, silver demand from solar panels accounts for 10 percent of physical demand, and despite growing sales of solar panels around the world, the product’s main market is Europe, a market that will likely see significantly lower sales in 2013. As a result, silver may take longer than gold to see a price reversal.
• In a Project Syndicate article this week written by Nouriel Roubini, the famed economist listed six reasons why he believes gold has further downside. He listed the selling of gold reserves by governments facing liquidity problems and the rise of real interest rates as two of the reasons to justify his belief. However, what shocked us the most was his one-sided analysis of these arguments. It may be true that the Cypriot Government announced the selling of gold reserves to cover part of its liquidity needs; however it is also true that governments around the world are buying more gold than they are selling. We have reported numerous times on the sizeable bullion purchases by central banks around the world.
• Continuing with the discussion above, Roubini argues rising real interest rates will cripple demand for gold. As we see it, the Federal Reserve has a cap on acceptable interest rates given the effect such moves create in its hefty portfolio of such securities. Should nominal rates rise above that cap, the Fed would have no option but to increase the rate of intervention. Similarly, a weakening dollar will help fuel inflation, which coupled with capped or falling nominal yields, would have the effect of lowering real rates, rather than increasing them as Roubini argues.

Opportunities

• The spike in the 10-year treasury yields last week triggered a whole new round of analysis of the current positioning of the U.S. dollar and its impact on our funds. As mentioned in the gold strengths section, we are of the opinion that the dollar will see some sustained weakness in the short to medium term. A strong dollar has previously been associated with lower inflation, which tends to negatively affect the gold price. The chart below shows how the correlation between inflation and the trade-weighted U.S. dollar has strengthened over the last 12 months. As we prepare for a period of dollar weakness, we anticipate inflation numbers are likely to increase in the medium term, which should bode well for a gold price recovery.

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• Although nonfarm payrolls for the month of May came in just over consensus expectations, the unemployment rate increased from the previous 7.5 percent to 7.6 percent. The disappointment further diminishes the probability of the Fed engaging in any form of quantitative easing tapering in the medium term. The lower possibility of early tapering should bring back some interest to the gold space.
• John Mauldin, the renowned financial writer and economist, dedicated the latest issue of his newsletter Thoughts from the Frontline to analyzing the situation of excessive monetary easing, this time from the Japanese perspective. It was a great reminder of why investments in gold and real assets are an essential portion of any investment portfolio. The following section of his commentary summarizes the madness taking place in the markets today; “It costs the Japanese government 24 [percent] of its revenues just to pay the interest on its debt at current rates. According to my friend Grant Williams (author of Things That Make You Go Hmmm...), if rates rise to just 2.2 [percent], then it will take 80 [percent] of revenues to pay the interest. Even at the low current rates, the explosion in Japanese debt has meant that interest rate expense has risen from Y7 trillion to over Y10 trillion. [The] Japanese government is now issuing more in bonds than it pays in interest. Somewhere, Charles Ponzi is smiling.”

Threats

• A class action lawsuit has been filed against Barrick Gold in the United States District Court for the Southern District of New York. The lawsuit was filed on behalf of all purchasers of common stock between May 7, 2009, and May 23, 2013. The plaintiffs’ argument relates to “false and misleading statements and concealed material information relating to the cost of and time to production projections for the company's Pascua-Lama Project [on] the mountainous border between Argentina and Chile.”
• The Environment Secretary of the Philippines mentioned during an interview this week that an increase in mining taxes would likely be part of the ongoing mining reform. The measure will have to go through congress before being ratified; however, speculation at the moment calls for a 10 percent excise tax from the previous 2 percent. While additional taxation on miners has become a rule rather than the exception, the open questions regarding the timeline and amount of the measure are more disruptive for gold miners in the country than the tax itself.
• In India, the world’s largest bullion market, taxes on gold imports have been hiked once again in a futile attempt to dampen record imports of the yellow metal. The South Asian nation is battling a record current account deficit at a time when physical demand for jewelry and investment is at its highest level. Effective immediately, bullion imports would be subject to an 8 percent levy, up from the previous 6 percent. It is worth noticing that the levy stood at 2 percent at the beginning of last year. The tri-fold increase over the last 15 months has had minimal effects on improving the trade deficit as Indian merchants and buyers find alternative ways to circumvent the unsubstantiated measure.