Gold Market Radar (April 14, 2014)
For the week, spot gold closed at $1,318.42, up $14.77 per ounce, or 1.13 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose .06 percent. The U.S. Trade-Weighted Dollar Index fell 1.15 percent for the week.
Strengths
- Gold rose to a two-week high following the release of the Federal Reserve minutes, which showed that projections for an interest-rate increase may be overstated. According to the Fed, several participants expressed concerns that the rate forecast could be misconstrued, indicating a move to a less-accommodative function. On a related note, Ted Dixon, INK Research founder, commented during an interview on current insider buying trends in the gold space, stating that insider buying in U.S. stocks has been languishing for a long time. But the indicator for the TSX Gold Sector shows a ratio of insider buying to insider selling of 2.5:1. This is one of the most bullish readings ever.
- On Thursday, Goldcorp responded to Yamana Gold’s friendly offer for Osisko, raising its hostile bid to an implied value of $3.3 billion, roughly $1 billion more than Goldcorp’s original offer. According to Nick Pocrnic of Raymond James, it is not unreasonable to imagine Osisko’s CEO Sean Roosen, and Peter Marrone, Yamana’s CEO, appealing to the Quebec government to sweeten the Yamana offer and prevent Goldcorp from acquiring the company. This transaction highlights the recent pick up in merger and acquisition (M&A) activity in the gold sector. Total transaction volume for the first quarter of 2014 nearly equaled that for all of 2013, as the large cap producers got involved. What could be next? Detour Gold, Aurico Gold and Probe Mines could all add quality ounces in a safe jurisdiction.
- NGEx Resources announced drilling results at its Filo Del Sol project in Argentina. The results included intercepts of 5.80 percent copper over 22 meters, and a 6-meter interval of 12.41 gram per tonne gold. The company rose 15 percent following the announcement. Lucara Diamond Corp., which produces high-value precious gems from its flagship Boteti Karowe diamond mine in Botswana, on Thursday held its first exceptional stone tender of the year, which garnered gross proceeds of $50 million, an impressive average price per carat of $42,347. Mariana Resources' shares rose after it received a $0.6 million VAT refund from the Argentinean tax authorities. The funds will be utilized to advance its gold and silver exploration properties in the highly prospective Santa Cruz province, southern Argentina.
Weaknesses
- In a highly-commented Mineweb article, author Lawrence Williams details that Former Assistant Treasury Secretary Paul Craig Roberts stated categorically that the gold price is indeed manipulated by the U.S. Fed. The Fed has had to resort to this practice in order to protect the value of the U.S. dollar and its reserve currency status from its effective reduction in value through its quantitative easing (QE) policy. According to Roberts, intervention in the gold market has been occurring for a long time, but has become more and more blatant and desperate recently. Roberts says that the Fed accomplishes it through a series of gold price flash crashes by short selling huge amounts of gold futures into the COMEX market, usually at times when trading is thin.
- Centamin reported that for the first quarter of 2014, total gold production from its Sukari mine in Egypt fell 19 percent quarter-on-quarter to 74,241 ounces. The result is certainly disappointing given that the company has been implementing a major plant expansion and was thought to be in a position where higher-grade, underground sections were being accessed, thus providing more ore to the mill. The production shortfall is attributed to poor mining fleet availability, with the company stating that underground mining equipment issues have been rectified by the end of the quarter.
- Primero Mining provided disappointing 2014 guidance for its recently-acquired Black Fox asset. According to the miner, 2014 production will reach 70,000 to 80,000 ounces with operating costs of $850 to $900 per ounce, with a total capital expenditure bill of $48 million. The forecast compares very poorly with much more optimistic analysts’ estimates based on operating metrics observed during Brigus’ operation of Black Fox. According to BMO analyst Brian Quast, Primero’s cost assumptions appear ultra-conservative, and he expects the asset to show an improving trend going forward.
Opportunities
- Mining-focused, private equity firm Waterton Global Resource Management has raised $1.016 billion for its latest flagship precious metals fund. The Waterton Precious Metals Fund II will focus on late-stage development projects in politically stable jurisdictions, primarily North America. Acquisitions will likely be in the range of $25 million to $200 million, and will speed up or slow down capital deployment depending on the opportunities.
- On Monday night, Philippe Couillard’s Liberals won a formidable majority in the province of Quebec. The implication for the resources sector is the imminent acceleration of the Plan Nord, a massive mining development plan that when first introduced, called for $80 billion in investment over 25 years. This included $47 billion towards renewable energy and $33 billion towards mining and infrastructure. The following day Stornoway Diamond Corp. announced its entry into a $944 million binding financing agreement with a syndicate of Quebec funds and lenders for the construction of the Renard Project in north central Quebec. The opportunity for Quebec-domiciled names and operators such as Virginia Mines is tremendous.
- Barry Bannister, Chief Equity Strategist at Stifel, published a report highlighting that U.S. real interest rates are set to decline, which bodes well for gold in 2014 and may bring the yellow metal to $1,600 per ounce. His analysis partly reflects the opinion of Jefferies Strategist David Zervos, who argues the Fed will continue to punish cash hoarders, mainly by allowing real interest rates to go negative. Negative real interest rates force investors to deploy their cash as cash-hoarding comes with a cost in the form of inflation exceeding the nominal return on cash.
Threats
- Gold is set to drop as the U.S. economic recovery picks up, according to UBS analysts. The Swiss bank’s analysts believe gold will trade between $1,300 and $1,350 per ounce at the end of the year, arguing that any price rally will prove short lived. Analyst Tom Price stated that the outlook is modestly bearish as the U.S. comes out of the winter period, and economic activity continues to lift and deliver good macroeconomic support.
- Gold is Morgan Stanley’s least-preferred commodity among the metals on the outlook for rising U.S. interest rates and low inflation expectations. Analyst Joel Crane states that the factors that boosted bullion in the first quarter, including Ukraine tensions, are set to weaken. As a result, Crane expects prices to drop for the next four quarters.
- On May 13, the SEC’s Dodd-Frank-mandated conflict minerals reports are due, and a significant number of public companies risk falling behind, according to PwC. According to Mineweb, the conflict minerals rule requires companies registered with the SEC to determine or disclose if any of their minerals, including gold, may have originated in the Democratic Republic of the Congo. If so, the companies must determine whether these minerals in the products are conflict-free.
