Gold Market Radar (November 25, 2013)
For the week, spot gold closed at $1,244.33, down $45.87 per ounce, or 3.56 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 7.83 percent. The U.S. Trade-Weighted Dollar Index slipped 0.19 percent for the week.
Strengths
- Pretium Resources reported that out of 8,090 dry tonnes of excavated material from the Valley of the Kings Bulk Sample Program, 4,215 ounces of gold were produced. There are still 1,815 wet tonnes of material that remain to be processed before a final tally of the 10,000 tonne sample is completed. Pretium was expecting about 4,000 total ounces to be recovered from the sample to test the validity of its resource estimate on the high-grade ore body. The company’s share price fell significantly when one of its two independent companies, each conducting different estimates, resigned from the project. Pretium’s share price surged 82 percent on the results.
- Although somewhat delayed, billionaire hedge fund manager John Paulson maintained his gold holdings unchanged in the third quarter of 2013, according to his filling on November 14. This parallels what we have seen from other major gold funds in third-quarter filings, reflecting the fact that redemptions were very subdued, as across-the-board selling of top holdings did not repeat the mass liquidations seen in the second quarter. In addition, George Soros’ third-quarter filings revealed that he has moved back into gold stocks and has been decidedly bearish of the broader equity market recently.
- Demand for gold bars, coins and jewelry hit a record during the third quarter, according to the World Gold Council. The strong demand comes from both China and India, accounting for about 60 percent of all gold demand. Central bank gold demand also continues to move higher. Russia now holds the second-largest reserves in the world, with over 400 million ounces of gold. Finally, we are now entering a time of seasonal strength for consumer gold purchases due to the Christmas holidays in the United States and Europe, the Lunar New Year in Asia, and also Valentine’s Day in the U.S.
Weaknesses
- Organized price manipulators are still trying to panic investors into selling off their gold holdings, after the market potentially recorded the biggest part of its correction. On November 20 the COMEX had to suspend trading of December gold futures for about 20 seconds after the contract’s price fell about $11 within a minute. This happened before normal trading hours in the U.S. As often as this has occurred in recent weeks, it’s amazing that regulators ignore these multibillion-dollar speculative trades. Shareholders’ wealth in some of these publicly-listed firms could be quickly wiped out should the gold price rise.
- Citi Research, in its annual commodities forecast for 2014, suggests that we will have strong physical buying (much from Asia) over the next year, limiting the downside for gold prices. However, the western buyers who are getting out of the market will likely continue to do so. Citi Research specifically pointed to two reasons why these buyers are getting out of the gold market: 1) Inflation concerns and expectations have all but evaporated, and 2) The opportunity cost of holding gold as opposed to other assets is high. As a result, we are seeing funds moving out of gold and into other asset classes.
Opportunities
- Duan Shihua, a partner at Shanghai Leading Investment Management, says that gold demand will remain strong in China. There are very few places to put money in China. With the share market down and the government nudging people away from real estate, gold should remain a favored investment choice. Gold consumption should surge by 29 percent to a record 1,000 metric tonnes in 2013, based on estimates provided by 13 analysts.
- TD Securities, in its Precious Metals Outlook from November 19, outlined some positive data points summarizing third-quarter results. Earnings were generally better than expected despite the gold price posting its lowest average quarterly price since the third quarter of 2010. TD noted that 21 out of 27 producers that it covers met or exceeded consensus earnings per share estimates. Cash costs are declining faster than expected and all-in sustaining cost is declining. Finally, production growth is picking up, and on a 12-month rolling basis it is up 3 percent among the large cap producers.
- The ratio between the NYSE Arca Gold Bugs Index and the gold price dropped last month to its lowest level since January 2001, when the first of 12 straight annual gains for the precious metal was beginning. The November 20 ratio reading was 3.2 percent above the low.
Threats
- The Ghanaian government plans to reintroduce a mining windfall tax as Ghana announced they will target economic growth of 8 percent in 2014, seeking to trim its budget deficit by 8.5 percent of gross domestic product. In 2012, a mining bill to impose a 10 percent profit tax was not considered by parliament.
- The largest U.S.-based gold ETF holdings dropped to 863.01 metric tonnes, the lowest since February 2009. Selling from the ETF has been a major headwind this year as the Federal Reserve indicated it was considering an exit strategy from its accommodative policies. According to a Bloomberg survey, Fed policy makers will likely slow the pace of monthly asset purchases to $70 billion from $85 billion at the March meeting.
- Goldman Sachs again reissued its negative forecast on gold, predicting at least 15 percent in losses next year for the precious metal, as well as iron ore, soybeans and copper. This gloomy report suggests a drop in the gold price to $1,050 for 2014. Goldman believes that commodities will face increased downside risks even as economic growth in the U.S. accelerates.
