Gold Market
For the week, spot gold closed at $1,333.30, up $37.20 per ounce, or 2.87 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 6.68 percent. The U.S. Trade-Weighted Dollar Index lost 1.15 percent for the week.
Strengths
- As we reported on June 21, open interest figures in COMEX showed U.S. banks turned their record short gold position into a record long. Following up on that note, Germany’s Commerzbank announced it is upgrading its gold price forecast, saying the yellow metal would rise to $1,400 by the first quarter of 2014. Similarly, Commerzbank said that a rebound for gold would help silver get to $21 in the fourth quarter and $23 in the first quarter next year. While the forecast upgrades are not very sizeable, it is interesting that a large bank raises its gold price forecast. For many months, forecasts have gone only in the other direction. Further to that, Goldman Sachs announced it is sticking to its average forecast of $1,413 for an ounce of gold this year as it does not see sharp reductions in U.S. Federal Reserve stimulus, after fears of such cuts drove bullion prices to near three-year lows recently.
- Much has been said about bullion ETFs listed in the U.S. seeing significant outflows this year, but investors in their newer Asian counterparts are a different story. A net $33.5 million was added to Asian gold and precious metals miners’ funds in the second quarter. The inflows are not very large in size, but they serve to reinforce the idea that Asian appetite for gold is relentless. On another note, Russia, the fourth-largest gold producer, announced plans to set up a stock exchange for junior gold and other mining companies to encourage exploration. Such a move likely will help miners raise funds to address the concern of dwindling global gold reserves.
- Alamos Gold made its second recent small cash transaction by acquiring Orsa Ventures. The transaction adds longer-term leverage to gold prices for a low premium of $3.5 million, which makes for a clever move in this type of environment. Orsa Ventures holds rights to the title to the Quartz Mountain Property in Oregon, with inferred resources of 2.85 million ounces of gold at 0.80 grams per ton. On a second transaction this week, Orsu Metals Corporation, a precious metals exploration and development company, announced that Goldfield completed a subscription for 25 million units of the company at a price of $0.40 Canadian per unit; more than 10 times the trading price of $0.04 Canadian prior to the announcement. These two transactions serve to reinforce the idea that companies with good prospective assets traded down with the market and may offer an exciting entry point for investors.
Weaknesses
- Credit Suisse’s commodity specialists published a commentary this week in which they discussed the negative mood for gold investors has moderated somewhat recently with a stabilization in gold prices. The specialists highlight investors are citing the seasonal uptick in gold demand as a reason to buy into the space. However, it is their opinion that the tightening import restrictions in India announced this week imply a demand reduction of about 500-700 tons. It is our opinion that the relentlessness of Asian gold demand is misunderstood by many commodity analysts, since they make little effort to understand the historical and cultural implications of gold in these cultures. As such, we expect the Indian bullion market to find alternative methods to overcome this import/export restriction. After all, the Reserve Bank of India has been implementing restrictions for nearly two years with very limited success.
- The South African miners’ wage negotiations have been pushed into an arbitration hearing as the gap between the offer by gold producers and demands by the miners barely changed since negotiations earlier this month. The collective body representing the gold miners increased its proposal to raise miners’ salary by 5 percent while the miners’ union (NUM) pushed for a 60 percent wage increment. Such a wage increase is totally unaffordable for the mining companies and the country. In addition, the loss in labor productivity has been material, making any further wage increase unsustainable, evidenced by the fact that South Africa gold mined has fallen from 400 tons in 2002 to 167 tons in 2012.
- AngloGold Ashanti announced the pricing of an offering of $1,250 million aggregate principal amount of 8.5 percent coupon notes due 2020. Gold analysts are somewhat surprised by the high coupon demanded by investors considering that Barrick Gold’s 2022 notes are trading at a 5.1 percent yield. By AngloGold biting on this transaction, it likely will set a precedent for future debt offerings in the gold space at higher costs to companies.
Opportunities
- Stockhouse, the Canadian financial portal, published data on junior gold miner valuations showing that the average valuation of 50 junior gold miners it tracks on the Toronto Stock Exchange and the TSX Venture Index (with a minimum 1 million ounces measured and indicated resource), have come close to $11 in market capitalization per gold ounce last week. Even though they have since recovered from that low and currently sit near $12.40 per ounce, they remain in extremely oversold territory, even when factoring in current gold prices. There was evidence already this week, albeit only in the mid- and senior-producer space, that gold valuations have reached depressed levels where negative earnings’ reports barely budge valuations.
- The first quarter of 2013 saw net de-hedging of 352,000 ounces (11 tons), leaving the global hedge book at 3.59 million ounces (112 tons), the lowest since quarterly series began in 2002. A total of 32 companies reduced their positions during the period, while the positions of just three companies increased. Preliminary second-quarter data suggests miners took the opportunity to further reduce hedging, as covering their hedges became cheaper as gold prices fell sharply in April. On a different note, COMEX open interest in gold options surged to a new record high of about 5,600 tons, or about two years’ total annual mine production, on Wednesday. This move is indicative of still very strong trading interest in gold, and implies that speculators are taking a view on potentially higher prices for the third quarter.
- The ratio of puts per call for the iShares Silver Trust ETF declined to its lowest level since March 2009. The reason the measure tumbled is the fact that the number of puts dropped 17 percent since the end of April, while the number of calls increased by 9.4 percent in that time. This decline in the ratio signals that silver may rise 38 percent to $28 an ounce by early next year, according to Tom Power, a senior commodity broker at R.J. O’Brien & Associates in Chicago.
Threats
- The Reserve Bank of India (RBI) said this week it would be mandatory for gold buyers to set aside 20 percent of bullion imports for re-export as jewelry as it seeks to control the nation’s current account deficit. The consensus appears to be that imports may tumble significantly in the second half of the year. However, we see an opportunity for both jewelers and bullion importers to work together as their interests are aligned. What most likely will happen, in our opinion, is that bullion importers will set a scheme in which they will purchase export credits from the jewelers by acting as intermediaries between the jewelers and the export market. The demand for physical gold in India is unrelenting, and there are multiple legal alternatives to circumvent the RBI’s abusive policies.
- Gold analysts at Stifel Nicholaus reminded us this week of a potential catalyst for the global economy and the price of gold coming as soon as this September. The debt ceiling debate in 2011 that led to the downgrade of the credit rating in the U.S. and the gold rally to $1,900 is coming up again. In the note, Stifel states there is zero confidence that the debt ceiling debate will be resolved in a manner that satisfies the rating agencies.
- The International Monetary Fund (IMF) issued a warning saying any Fed stimulus tapering runs the risk of destabilizing the eurozone as it recovers from its debt crisis and may push the weakest countries into a debt deflation spiral. But it is not only the IMF telling the Fed it cannot do any tapering; the markets sold off dramatically last time Bernanke hinted at the possibility of it occurring later this year.
