Gold Market Radar (February 24, 2014)
For the week, spot gold closed at $1,324.10, up $5.41 per ounce, or 0.41 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.00 percent. The U.S. Trade-Weighted Dollar Index rose 0.16 percent for the week.
Strengths
- Gold rose to a 15-week high as U.S. retail sales and housing starts slumped at the same time as Chinese manufacturing data fell to its lowest level in seven months. In addition, the political unrest in Ukraine and Thailand boosted gold’s haven premium. On a more positive note, gold demand in Japan jumped threefold in 2013 as investors sought refuge from Prime Minister Shinzo Abe’s campaign to stoke inflation. India’s gold demand remained buoyant in 2013, rising 13 percent from 2012 despite the government introducing several restrictions to curb imports. Lastly, JP Morgan raised its outlook on gold, saying prices are likely to hit $1,450 by the end of the year as fundamentals have turned bullish.
- A recent report from the Swiss Customs Administration shows the European nation shipped more than 80 percent of its gold and silver bullion to Asia last month. The main destinations were Hong Kong, India and Singapore, while the main sources of gold imports were the U.K and the U.S. Despite the recent price recovery in gold, the demand from physical buyers in Asia continues to drive a wave of gold finding its way from weak hands into strong hands.
- Mandalay Resources reported earnings this week, beating consensus expectations. Management continues to deliver in terms of growth and profitability, while returning value to shareholders via an attractive dividend. Similarly, Pan African Resources rose to a 14-month high as pretax profit jumped 30 percent in the first half of its financial year. The company said sales in the first half were buoyed as its Barberton Mines in South Africa increased the amount of gold sold from its newly commissioned Tailings Retreatment Project, and its Evander Mines in South Africa became fully integrated into the company.
Weaknesses
- The two “most accurate” gold forecasters are holding on to their bearish forecasts for 2014 even after the metal posted its best start to a year since 1983, according to a Bloomberg report. The report cites analysts at Societe General and Westpac Banking as the best forecasters over the past two years; however, what the report fails to convey is the fact that these analysts are permanently bearish on gold, and the 15-month recent downtrend favored their forecasts. Now that the fundamentals have changed and the downtrend has been broken, it would be wise to appraise these forecasts.
- Yamana Gold took a $672 million before-tax impairment charge for 2013 as it examined its future cash flows and the intrinsic value of its reserves. The charges include $262 million on exploration properties which highlight the pervasive level of capital misallocation of the past years. In addition, OceanaGold posted an unexpected $47.9 million loss on impairment charges to its New Zealand assets in the face of a lower gold price.
- AngloGold Ashanti announced a jump in production and a reduction of costs for the year 2013, but recognized it still has much to do before it can return to a positive cash flow generation. As a result, the group decided against a final dividend for the year. This situation is familiar for other gold producers who have cut their dividends in the recent quarter; Yamana Gold and Agnico Eagle come to mind.
Opportunities
- UBS boosted its forecast for gold in 2014 citing a change in investors’ attitude toward the yellow metal. According to the bank’s analysts, over the past year gold was either the favorite asset to short or was ignored completely. Recent developments suggest that this is no longer the case and momentum is turning, the analysts added. Moreover, BCA Research published data showing gold mining shares were down more than 40 percent over the past year. As shown in the chart below, each decline of more than 40 percent since 1980 has given way to at least a tradable rally.
- Goldman Sachs is of the opinion that mining capital spending continues to decline, with 2015 mining capex estimates being reduced by 8 percent in the last three months alone. However, the key drivers of this reduction appear favorable: young equipment fleets, the winding down of projects and a focus on higher grade deposits. As a result, we may see higher near-term cash flows and a more disciplined capital allocation process.
- India, which lost its crown to China last year as the top gold consumer, is likely to cut its import tax on gold before the end of February to 6 or 8 percent from the current 10 percent. The government initiative comes as pressure on the country’s current account deficit has scaled down, with recent data showing it has fallen by nearly 50 percent.
Threats
- Despite an apparent lack of inflationary pressure in the U.S., and ongoing disinflationary trends in the eurozone, the continuous commodities index, which tracks commodity baskets, has risen sharply. Many agricultural commodities have strengthened following poor conditions in several geographies, and energy prices have increased following colder than usual winter weather. These increases may appear transitory, but the index shows a very strong correlation with inflation readings and, as such, we could see month-over-month inflation readings turn positive over the next couple months.
- The Province of Quebec is seeking to preserve head offices in the province, even if that means thwarting bids. On the back of the recent bid for Osisko Mining, Quebec will move to enact legislation that shields businesses from takeovers by allowing the province to purchase stakes in the ownership of homegrown companies. The measures are aimed at preserving head-office jobs that help generate the C$5 billion in economic activity.
- Although the current strike in the platinum industry is broader than previous events, the metal price reaction has been relatively muted so far. The strike was preannounced, giving the industry time to prepare, but should the current stalemate continue, some tightness could start to develop.
