Gold Market Radar (October 7, 2013)
For the week, spot gold closed at $1,310.39, down $26.26 per ounce, or 1.96 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 3.62 percent. The U.S. Trade-Weighted Dollar Index lost 0.20 percent for the week.
Strengths
- Chinaâs physical gold buyers have largely replaced western ETF investors as the primary underpinning of demand. In a recent publication titled âGold: The Silk Road Redux,â Kitco CEO Ross Norman addresses the implications of gold migration to the East. His main argument is that gold migration from western to eastern hands may ordinarily be thought of as price neutral, but in fact it isnât so. The main reason is that Asian buyers tend to purchase physical gold as a form of long-term savings, and as such, they âdo not sell when the price goes up, nor do they sell in a panic when the price drops.â To put it plainly, according to Ross, the âChinese market is a lobster pot for goldâeasy in, difficult outâas the country has a strictly enforced non-export policy for gold.â Which begs the question: have you ever seen a Chinese gold bar in the West?
- Gold Standard Ventures reported assay results from its first confirmation drill hole on the Bald Mountain property in Nevada. The drilling reports high-grade oxide gold with sulphide copper-gold mineralization over 56.1 meters at 1.47 grams per ton. In addition, Platinum Group Metals (PLG) has been granted prospective licenses over a 530 square kilometer land package to the north of the Waterberg joint venture. Obtaining this license allows PLG to test the strike extension on ground where its effective ownership is 87 percent versus the 49.9 percent in the existing Waterberg joint venture. Finally, Pilot Gold reported the latest drilling out of KDC has delivered some impressive step-out holes that showcase yet again the extent of the potential at its TV Tower project in Turkey. Step-out drilling at KDC hit 112.5 gram per ton silver over 70.5 meter, which included a 143.8 gram per ton silver intercept over 25.5 meters.
- Coventry Resources has announced a merger with Chalice Gold Mines in a stock transaction that will have Coventry shareholders holding 17 percent of the merged company. The merger will combine Coventry's Cameron Gold Deposit in northwestern Ontario with Chalice's AUD $55 million cash balance. The deposit has a 43-101 compliant resource comprising 567,000 ounces of gold at 2.45 gram per ton gold in the indicated category and 830,000 ounces gold at 2.11 gram per ton gold in the inferred category. According to Haywood analysts, the announcement represents another example of consolidation between junior exploration companies within a challenged economic environment and bodes well for further merger and acquisition activity.
Weaknesses
- A weakness in the stock selection process of the Market Vectors Junior Gold Miners ETF (GDXJ) was exposed today, as Lion Gold, which is the largest holding in the GDXJ, plunged 42 percent and was suspended from trading by the Singapore Stock Exchange on news of the companyâs potential acquisition in an undisclosed company. Last April, Red 5, an Australian listed gold company which was also a significant holding of the GDXJ ETF, ceased trading and could not repay its loans after the milling facility failed. We advocate for investors to avoid market cap and liquidity-based ETFs as their vehicle for gold exposure and instead propose investors benefit from an actively managed approach based on model-driven metrics, as we believe this process can help investors avoid such tragedies.
- Credit Suisseâs Tom Kendall was out this week with a research note highlighting that gold should start to see downward pressure resuming soon. The main bearish premise in his argument is that an ongoing gradual normalization of real interest rates resulting from a lack of inflationary pressure in developed markets will lead gold to average $1,150 per ounce in 12 monthsâ time. While Mr. Kendallâs argument is defensible, we would like to argue his inflation assumption may be flawed. David Rosenberg of Gluskin Sheff was on record this week stating the deflation talk is âoverdone,â as he is having a tough time reconciling deflation with the latest data on wages and prices. In his research, labor costs are trending up, and various inflation expectation readings are ticking up. Mr. Rosenberg backs his thesis with a statistical study that shows the five-year inflation expectation measure reported by the Cleveland Fed has a 99 percent correlation with actual inflation, and this particular reading bottomed out in March and is now at the highest level since July 2011.
- Demand for U.S. gold coins fell 81 percent in September on a year-over-year basis, as political turmoil in Syria failed to rekindle retail buying that has slowed after months of exceptional bargain hunting, data on the U.S. Mint website showed on Monday. Mineweb reports gold coin sales are highly seasonal, with demand typically weakest in summer months before a pick up near year end when jewelers in India buy ahead of the Hindu festival of Diwali, a major gold-buying event. It is worth noting that year-to-date gold coin sales are at unprecedented levels, which have forced the U.S. Mint to limit both gold and silver coin sales at different periods due to a lack of coin blanks used to strike the coins.
Opportunities
- According to a release by the Cleveland Fed, a recent increase in Fed implied inflation, measured by the spread between Treasury Inflation Protected Securities (TIPS) and similar maturity Treasury Notes, is signaling an imminent rise in inflation. Don Coxe, Portfolio Adviser to BMO Asset Management, is of the opinion that gold is unloved right now because there always seems to be bad news in terms of inflation. Gold bears say if inflation hasn't come now with the quadrupling of the Fed's balance sheet, it's never going to come. As previously mentioned, some highly respected economists are having a tough time reconciling inflation readings with most economic wages and prices data. The essence of this subject is that once the economy starts to grow rapidly, gold will become a good news story and will respond to strong economic news at a time of massive liquidity, which translates into inflation.
- Gold futures may rebound to $1,425 an ounce in the fourth quarter after forming a âdouble bottom,â according to a technical analysis by Logic Advisors. According to the New Jersey-based advisor, a double bottom is a chart pattern showing a drop, a rebound and then another decline approaching the previous low, usually indicating price support. The most recent London Bullion Market Associationâs survey shows gold may advance 8.8 percent to $1,405 an ounce in about a year, according to the average response in a survey of attendees at the LBMAâs conference in Rome. Although the monetary and investment argument for gold is negative, the physical side is generally positive, according to James Steel, a HSBC Securities (USA) Inc. commodities analyst. Mr. Steel added that continued high levels of Chinese demand will be supportive.
- Some increasingly strange gold market movements have been reported recently. These adverse price movements in gold appear to have been orchestrated by massive âsalesâ of paper metal in volumes that have absolutely no relation to the amounts of gold being mined or available to the markets in physical form, according to Mineweb contributor Lawrence Williams. It is far from surprising that central banks and their allies may be manipulating gold; after all, if gold is viewed as moneyâi.e., a currency in its own rightâone already knows that governments have openly manipulated exchange rates (money) ever since countriesâ currencies went off a gold standard. The silver lining comes from the growing powers of the East, which do not see gold as an asset that can be readily manipulated; instead, they are hoarders. Chinaâs massive physical buying leads to the belief that it is consolidating into a position where it can use its financial power to usurp the United Statesâ position as the top dog in global trade. This year, China looks likely to import perhaps 1,200 tons of gold through Hong Kong, largely exchanging its U.S. dollar-denominated reserves into gold. With India expected to import close to 1,000 tons of gold this year, these two countries alone could account for perhaps all of 2013âs global new gold production. Gold appears to be in safer hands.
Threats
- Now we know why the Federal Open Market Committee voted not to taper at last monthâs meeting of the committee, according to Ed Yardeni. In a recent investorâs note, Yardeni comments that Fed-Boston President Eric S. Rosengren said there were three concerns that argued against tapering. On top of âdisappointingâ economic data, and the worryingly rapid rise in government yields, the third reason was the upcoming fiscal deadlock in Washington. Needless to say, this weekâs events in Washington must be convincing the super-doves that they made the right decision to do nothing about the $85 billion per-month pace of QE purchases. Warren Buffet is of the opinion that policymakers will go right up to the point of âextreme idiocy, but we wonât cross it.â We wonât cross it because there is no other alternative other than raising the debt ceiling, and as the chart shows, the gold price has followed the historical pattern of going up right along with the debt ceiling.
- The premium for physical delivery of gold on the Shanghai Futures Exchange dropped to less than $10 an ounce at the end of September from more than $40 an ounce in July. With Chinese markets on holiday for the week ending Tuesday, we will need to wait until then to get a clear signal on the price direction. What has become evident is that Chinese buying is in fact very supportive of gold prices. In an episode this past Tuesdayâthe first day of the market holiday closure in Chinaâa big seller offered 10,000 futures gold contracts for sale at a time of the day when European and U.S. buyers are not at their desks, leaving only Asia-ex China buyers to cross the sizeable trade. The resulting $41 per ounce price decline had the appearance of market manipulation.
- Indiaâs jewelers are raising concerns over the prohibitive legislation on gold imports that is threatening to drain their respective inventories and making them unable to meet the high jewelry demand period that starts with the Navrati festival this weekend. The peak gold sales season generally starts with Navrati and continues until January. In their desperation, Indian jewelers are attempting to bring idle gold back into circulation by collecting gold from households into trusts, thereby liberating gold for consumption. Despite the fact that we normally oppose such trust programs as they generate tradable âpaper goldâ that need not be delivered physically, creating a parallel market prone to manipulation, we are of the opinion that this mechanism may work since depositors receive interest payments in terms of gold bullion. The U.S. dollar is considered a currency because it is legal tender to settle debts, and so is gold under this mechanism.
