Gold Market Radar (November 11, 2013)
For the week, spot gold closed at $1,288.60, down $27.60 per ounce, or 2.10 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.39 percent. The U.S. Trade-Weighted Dollar Index rose 0.61 percent for the week.
Strengths
- Bloomberg reports total known gold ETF holdings have fallen 29 percent since their all-time peak earlier this year, contributing to the almost 25 percent decline in gold prices. However, as the chart above shows, gold investors have found solace recently as gold ETF redemptions have ceased to be the main driver of gold prices. As reported previously, increased physical demand emanating mainly from China has been supportive of gold prices at the $1,300 per ounce level. Recent data shows physical demand remains at its strongest level with China importing an additional 109 tonnes of gold from Hong Kong during the month of September. At the current pace, Chinese imports would reach over 1,150 tonnes for 2013. Similarly, U.S. Mint American Gold Eagle coin sales recovered to 48,500 ounces in October, while gold sales from Australia’s Perth Mint climbed 13 percent to 77,255 ounces.
- HSBC Precious Metals analyst James Steel reports that despite the strengthening of the U.S. dollar on good macro news, commitments of traders’ data gathered by the CFTC showed a 2.46 million ounce increase in net long speculative positions in gold to 10.68 million ounces in the most recent report available. Silver net long speculative positions increased by 6.3 million ounces to 130.7 million ounces. For platinum, net long positions increased by 157,800 ounces to 1,689,800 ounces, while palladium net long positions increased by 85,100 ounces to 2,740,200 ounces.
- Randgold Resources’ third quarter profit increased by 80 percent quarter-on-quarter to $97.5 million, despite a 3 percent drop in the average gold price, owing to strong performance at its flagship Loulo-Gounkoto in Mali. Gold sales increased by 38 percent from that of the previous quarter driven by increased grades and recoveries. Gold Standard Ventures announced that the next two core holes drilled into the North Bullion deposit on its 100 percent controlled Railroad Project in Nevada’s Carlin Gold Trend have extended the mineralization to the north and east. These increase confidence that the North Bullion gold deposit represents a major Carlin-style discovery. Mandalay Resources announced impressive third quarter results this week. Worth highlighting are cash costs which decreased nearly a third to $696 per ounce from a year ago. In addition, throughput was ahead of 2014 expectations, which gave the company confidence to raise 2014 guidance.
Weaknesses
- Ernst & Young’s report on third quarter merger and acquisition (M&A) activity shows a significant decline in value and volume transacted. According to the report, companies participating in the M&A sector are doing so mainly to take advantage of synergies to improve the bottom line, yet risk adversity is limiting the number of deals being made. Regardless, gold continues to be the sector with the largest number of deals, 55 in total. The big improvement in M&A activity was the rise of financial investors as main buyers of deals, highlighting that private capital has started to flow into the sector. Going forward, a recovery in gold stocks must be driven by interest from the generalist investors, who appear to be waiting on the sidelines until year end when impairment charges may hit balance sheets before they buy into the sector.
- A recent Pricewaterhouse Coopers (PwC) report on junior miners summed the carnage the sector has sustained in the recent past. Market caps in the junior space have fallen to $6.5 billion from $20 billion in 2011, while trading volumes have fallen to 38 billion from 79 billion over the same period. Despite the severity of the decline, the PwC report commends the resiliency of juniors, which surprised the authors.
- Detour Gold announced third quarter results this week to great disappointment, sending the stock down more than 18 percent. While analysts reported a much better than expected overall cost per tonne, the mill processed 3.88 million tonnes grading 0.72 grams per tonne gold during the quarter, a far cry from the expected 0.90+ grams per tonne. As a result, the company has lowered 2013 production guidance to a 250 thousand ounces midpoint, from the previous 270 thousand ounces. The outlook for 2014 was weak at a 470 thousand ounce midpoint, with analysts’ consensus above 500 thousand ounces.
Opportunities
- Despite the negative publicity in the junior sector, there is evidence that stock indices on the main exchanges where most juniors are listed have flattened off after months of steady downturns. Ernst & Young is of the opinion that junior mining indices are bottoming as positive press releases, new discoveries, and successful new financings provide floors for these stocks. But, according to Mineweb contributor Lawrence Williams, the most significant sign of bottoming is that private equity and small specialist funds are beginning to take a strong interest in the junior mining sector.
- The gold debate has crossed the line and turned argumentative according to Bullionvault research. Numerous high profile articles, most recently in the Wall Street Journal, argue that gold should be eliminated as part of your portfolio with the main argument being that it has decreased in price. The fact that price is front and center of the debate shows the misunderstanding of gold as a uniquely valuable asset. David Rosenberg agrees with this view in his commentary, where inflation has been diligently scrutinized. According to Rosenberg, there is little objection to the fact that housing and food inflation are a serious threat at the moment. Yet gold no longer makes the front pages of newspapers. Back in 2011 when gold rose to $1,900, investors were kicking themselves for having missed the bull run. Now, with gold around the $1,300 mark, gold has been relegated to “page B7 news.” When gold is on the front page you can count on all good news being priced in; when it is on page B7, which is reserved for unloved areas of the market, Rosenberg argues this itself is the most comforting news.
- Chinese appetite for gold will continue to be the key gold price driver in the months and years ahead. According to Mineweb, ever since China legalized private gold investment, demand has grown every year. The main rationale in China remains gold psyche as a store of wealth and inflation protector, especially as the Chinese middle class continues its extraordinary growth. But private investors are not the only sector accumulating gold in China; the People’s Bank of China has been clear in its objective to support the Chinese yuan in growing to the stature of an official reserve and settlement currency, which would be likely accelerated by a rapid accumulation of gold reserves.
Threats
- South Africa’s Parliament has delayed until next year the adoption of changes to its mineral law. Senior miners in the country have voiced their concern on the measures being considered as they will hurt business and discourage investment. Among the changes being proposed, the African nation will have the right to a free 20 percent stake in all ventures considered to be “compelling.” In addition, the government, through its Mines Minister, has the right to designate any mineral product for “local beneficiation” after considering “national development imperatives.” The lack of clarity, timeframe, and proper consultation with the affected enterprises is the greatest concern to the local mining industry.
- Allied Nevada released its third quarter results showing the lenders of its revolver credit facility amended, for the third time, the definition of the ratio covenants so that the company wouldn’t be in breach of covenants at the end of the third quarter. The company is currently working to renegotiate other covenants that are threatening to have it default both on the revolver and other senior note, term loan, and capital lease obligations. Michael Gray of Macquarie believes the company needs to secure $400 million in new financing between now and the second quarter of 2014.
- The U.S. derivatives regulator Commodities Futures Trading Commission (CFTC) has reintroduced a plan to set caps on the number of contracts held by a single trader. However, far from benefitting market participants and defeating speculative trading, the rules will benefit the largest market participants, such as Goldman Sachs and Barclays. For these type of participants, the maximum size of positions could rise dramatically rather than become tighter, in specific cases as much as tenfold. In addition, Commissioner Bart Chilton, a strong proponent of position limits, is set to leave the agency in the near future, leaving a power vacuum that will likely be filled by people akin to the largest market participants.
