For the week, spot gold closed at $1,350.80 up $34.55 ounce, or 1 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 7.94 percent. The U.S. Trade-Weighted Dollar Index lost 0.50 percent for the week.
Strengths
- According to the most recent data from the Indian market, current premiums for physical delivery are running at around 18 percent over the spot price of gold. The chart above shows that the premium has been steadily rising over the last two years, but it has accelerated since April of this year. According to Hebba Investments, a Seeking Alpha contributor, high premiums usually signify bottlenecks in the supply chain or a general shortage in the physical market; a shortage being extremely bullish for the gold market. In addition, Asian press is starting to pick up on this story and dealers are complaining that physical gold is in short supply. This is evident by people not willing to sell their old jewelry at these prices, according to a wholesaler in Kolkata.
- India's third-largest gold fund has reopened to investors after disallowing buy-ins three months ago. Reliance Gold Savings Fund, which manages about $300 million, originally closed to support government efforts to curb bullion demand and control a rising trade deficit. "The economic conditions are getting better and the dollar has come down...," said Sundeep Sikka, CEO of Reliance Capital Asset Management, justifying the re-launch. The rupee has appreciated 11 percent from its August lows, which could revive investment interest for physical gold and put pressure on supplies.
- Macquarie Commodities Research reports that retail sales in China of gold and silver jewelry during September were 21.9 billion yuan, according to data released by the National Bureau of Statistics (NBS) on Friday. This was 18 percent higher year-on-year, but still shy of August’s record, reflecting a seasonally weak period. Implied Shanghai Gold Exchange volume suggests sales of about 68 tons of gold, 44 percent higher than a year ago. NBS data also suggests China’s platinum group metals’ imports picked up in September. Palladium imports rose to 1.94 tons, up 24 percent year-over-year, while platinum imports were 10.6 tons, the highest in more than three years.
Weaknesses
- Mineweb contributor Lawrence Williams reported on this month’s unusual gold trades on the futures markets, which are now occurring almost daily. The chart above, by Reuters’ Frank Tang, shows the number of contracts traded daily and the corresponding movement in the gold price. What are visible are massive trading volumes every day of over 5,000 contracts, all around the same time. On the first of October, as well as on October 10, there were massive trades of over 20,000 contracts. This amount represents well over 2 million ounces, or around $2.6 billion. It’s safe to say nobody has that amount of physical gold, apart from the big central banks, so these trades are being done by entities trading gold they do not have in a manner designed primarily to trigger stop loss orders. However, someone with enormously deep pockets does have to be there in order to support these massive trades; the risks could be huge if the market turns against them. Obviously the “big bad banks” haven’t learned anything in regards to the risk of failure due to this speculation. It’s no wonder these trades took place while the regulators were on paid vacation, drawing unemployment benefits to boot!
- The Kyrgyz parliament has rejected a government-proposed deal with Centerra Gold on Wednesday. The deal called for setting up a joint venture in which both Centerra and the Kyrgyz government would own 50 percent of shares. Under the previous 2009 deal, the Kyrgyz government stake was set at around 33 percent. Parliament said that the government must negotiate a new deal with Centerra by December 23 to raise Kyrgyz ownership to 67 percent. In other news, Kinross Gold Corp. shorts were back on the rise heavily, up 10.5 million shares since September 30. This reverses a recent trend in Kinross shorts, which had dropped in the past couple of months.
- Macquarie, in its U.S. Strategy research this week, stated that the most important insight coming out of the September payroll report was the continued deceleration in private sector labor demand. The reading came in at a soft 126,000 new jobs, while the three month average retreated back to pre-quantitative easing levels, and is more than 100,000 below the early 2013 levels that prompted the initial tapering signals from the Federal Reserve governors. The deceleration likely continued into October thanks to the government shutdown, making it difficult for the Federal Open Markets Committee (FOMC) to justify that there has been a substantial improvement in the labor market.
Opportunities
- Eric Sprott, Chairman and CEO of Sprott Asset Management, is under the opinion that the gold supply and demand statistics published regularly by the World Gold Council (WGC) are flawed, despite the fact these numbers are considered to be industry standards around the globe. Mineweb reports that Sprott has written an “open letter” to the WGC, putting forward his company’s position in the gold supply and demand equation, drawing the conclusion that global gold demand exceeds available new supply by a substantial margin. Sprott argues that global demand totals 5,184 tons for this year, leaving gold supply short a massive 3,044 tons. Only a portion of this shortfall can be met through scrap sales and sales out of gold ETFs. It is no surprise to Sprott that the imbalance between supply and demand is not reflected in prices because available statistics misrepresent reality, mostly regarding demand from Asia.
- Gold is probably at a cyclical bottom, according to CPM Group. Bloomberg reports that CPM Group targets the gold price at $1,240 to $1,380 per ounce for the next few months. However, gold may trade in the $1,240 to $1,500 per ounce range for the “next couple of years,” before prices rise sharply in the 2016 to 2023 period, says CPM Group. Inflation expectations are likely to be vindicated by this time as the Federal Reserve will remain on an accommodative policy stance longer than previously anticipated.
- A Canada-European Union trade agreement could have major implications for the mining sector when it comes to investor protection. Likely one of the most significant developments in the Comprehensive Economic and Trade Agreement (CETA) for miners on both sides of the Atlantic is the inclusion of an investor-state provision. The provision, in practice, ensures foreign companies a process to recoup damages in cases of expropriation or instances where political process is grossly discriminatory against a foreign company, according to Kip Keen of Mineweb. Riyaz Dattu, a lawyer specializing in international trade law with the firm Osler, Hoskin & Harcourt, believes the fact that there is an investor-state mechanism being included in this agreement is one big step further towards a global framework for investor protection.
Threats
- Earlier this month, the Mexican Congress modified the tax reform proposal prepared by the Mexican Executive Branch, including a special mining fee of 7.5 percent of operating profits and an additional fee of 0.5 percent of gross earnings for gold, silver and platinum. In addition, Congress has proposed the elimination of accelerated depreciation for fixed assets and immediate deduction of pre-operative expenses. According to Macquarie analyst Michael Gray, the implications in the current lower-metal price environment are likely to further compress the profitability ratios of higher cash cost producers. Meanwhile, the elimination of the accelerated depreciation will limit the tax benefits upfront, which acts as a strong disincentive for exploration and mine development activities, but also sets a much higher feasibility threshold for assets, likely deterring M&A activity.
- Mineweb contributor Dorothy Kosich recently reported that 30 to 50 percent of junior mining companies are not expected to survive based on a recent British Columbia Securities Commission (BCSC) study. The study found that some mining executives felt the market has yet to hit its lowest point, and they don’t expect conditions to significantly improve for another three to five years. Participants agreed that there will be an eventual exodus of mining companies and exploration endeavors, reaching the conclusion that 30 to 50 percent of junior miners are not expected to survive.
- Jayant Bhandari, a former consultant to U.S. Global Investors who is knowledgeable on matters in India, wrote to us recently saying that he thinks gold will likely stay as the preferred way for Indians to save. However, with Indian currency falling about 12 percent this year, gold has become unaffordable for a portion of buyers. Going forward, the Indian rupee is likely to weaken up to 50 percent more as it is truly expensive for an economy at India's stage of development, and the fact there is little hope for the economic growth rate to increase. Bhandari’s comments coincide with recent reports by India’s finance ministry, claiming there have been significant improvements to the nation’s current account deficit. Nevertheless, this number fails to consider the growing unofficial imports of gold and the diversion of remittances escaping the tighter money flow conditions introduced recently. Therefore the projection of a lower current account deficit is a mere window-dressing exercise, highlighting that the government has not acted prudently to address economic headwinds, but instead has taken the easy way out of singling gold imports as a threat to the Indian economy. This year imports of silver into India have surged, perhaps as a substitute to buying the higher-priced gold bullion.
