Gold Market Radar (September 2, 2013)
For the week, spot gold closed at $1,395.15, down $2.60 per ounce, or 0.19 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 6.89 percent. The U.S. Trade-Weighted Dollar Index rose 0.83 percent for the week.
Strengths
- The Austrian Mint, which produces the Philharmonic coin, commented that sales increased this year after falling gold prices fueled demand. Sales of gold coins from January to July rose 79 percent from a year earlier to 383,500 ounces, nearly matching sales for the whole of 2012 at 400,000 ounces. The U.S. Mint has seen a similar surge in purchasers this year.
- Russia and Kazakhstan expanded their gold reserves for the tenth-straight month in July, while Mexico reduced its holdings. Russian holdings, the seventh largest by country, gained about 6.3 metric tons to 1,002.8 tons. Kazakhstan’s reserves rose 1.1 tons to about 132 tons, and Turkey boosted holdings by 22.5 tons to 464 tons. Various nations added 534.6 tons to reserves last year, the most since 1964, and the World Gold Council expects that central banks may buy 350 additional tons this year.
- Over the last 60 days, the one-month and three-month gold forward offered rates have turned negative, and historically this means the gold price rises. Gold forward offered rates are the interest an investor has to pay on gold-collateralized U.S. dollar loans. Under normal circumstances, it is positive for an investor to pay interest in order to borrow U.S. dollars against gold collateral. However, since July 2103 an investor with gold is now being paid interest to provide gold as collateral against U.S. dollar loans. The most likely reason behind the negative gold forward offered rate is a shortage in physical gold supply.
Weaknesses
- Gold surged earlier in the week with the prospects of an expanded conflict in Syria, but retreated somewhat later in the week from a three-month high on speculation that the Federal Reserve will follow through on its plans to withdraw stimulus. The U.S. economy expanded more than previously stated. Gross Domestic Product for the second quarter was revised up from 1.7 percent to 2.5 percent. Application for jobless benefits declined from 336,000 to 331,000, adding to the case for the Fed to taper stimulus.
- South Africa says gold miners will go on strike next week after labor groups refused to accept a revised pay offer. A spokesman for the National Union of Mineworkers said that the strike will start Tuesday after the Chamber of Mines, which represents mine owners, did not improve its last offer of a 6 percent pay raise.
- U.S. gold production dropped 4 percent in the first five months of the year, according to the U.S. Geological Survey (USGS). The May production of gold by U.S. mines dropped 5 percent from production in May 2012. The USGS also noted that May was the eighth consecutive month that the average gold price decreased.
Opportunities
- Citigroup strategist Tom Fitzpatrick said in a telephone interview that gold and silver should surge in the coming years as the precious metals continue to benefit from easy monetary policies adopted by central banks. “We believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward. We still believe that in the next couple of years we will be looking at a gold price of around $3,500. As the gold and silver ratio plummets near 30, this would also suggest a silver price above $100,” Tom commented in the interview.
- CEE Holdings Ltd, a venture between Li Ka-shing’s flagship company and Canadian Imperial Bank of Commerce, is looking to invest in gold mining companies after a slump in prices created buying opportunities. CEE Chief Executive Officer Warren Gilman said in an interview in Hong Kong that “long term, gold is a good place to be.” Cheung Kong Holdings Ltd. is controlled by Li, Asia’s richest man.
- Today Alamos Gold reported the completion of a previously reported acquisition of all the issued and outstanding common shares of Esperanza Resources Corporation. To get the deal across the line, Alamos extended the expiry date of the proposed warrants of Alamos to be issued under the agreement to Esperanza shareholders. The expiry date was extended from four years to a term of five years from the effective date of the agreement.
Threats
- Finding new gold is proving difficult. Exploration spending has risen, but the success rate of finding major discoveries has fallen. In addition, despite a five-fold increase in gold prices, gold production has still not expanded. For established gold producers, this is a real challenge to value proposition, especially with any substantial pullback in the gold price. Exploration spending is the first thing that is cut to protect margins.
- India’s Trade Minister suggested that the central bank should look into the possibility of monetizing the country’s gold holdings. The plan was to have the banks buy the gold from ordinary citizens for rupees and recycle the gold, with an aim to reduce the imports of gold bullion into the country. This may have the effect of lowering Indian gold demand. However, it seems Indians have been buying gold in order to protect their wealth from a fall in the value of the rupee in international markets. Some have speculated that the only way to get the populace to turn in their gold would be by legislative mandate, or essentially a confiscation of wealth.
- India’s commodity market regulator ordered exchanges to double margins on gold futures. This came after a record plunge in the nation’s currency fueled a rally in bullion priced in rupees to an all-time high. Initial margins on all contracts will rise from 4 percent to 5 percent of the value from September 2. An additional margin of 5 percent will also be levied on gold, silver, Brent crude, crude oil and natural gas contracts.
