Gold Market Radar (April 29, 2014)

Gold Market Radar (April 29, 2014)

For the week, spot gold closed at $1,302.54, up $7.01 per ounce, or 0.54 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.26 percent. The U.S. Trade-Weighted Dollar Index fell 0.08 percent for the week.

Strengths

• Gold rebounded towards the end of the week to $1,302.54 per ounce, as conflicts in Ukraine continue and traders bet that prices will rise amid quickening inflation. Gold sales in Japan more than doubled in the first quarter, ahead of the consumption tax hike that is expected to fuel inflation. Platinum also posted strong performance this week as companies and labor unions in South Africa failed to reach a deal that would end a 13-week-long strike.
• Signs that inflation has likely bottomed are now showing up everywhere and should stoke inflation expectations in support of gold. The Federal Reserve’s M2 money supply growth is running at an annualized rate of 8 percent, a multiple of gold’s long-term supply growth of around 2 percent, annually. Similarly, U.S. bank loans have accelerated to levels not seen since 2007, with commercial and industrial loans rising at a 16.1 percent rate over the past 18 weeks. Similarly, average hourly earnings for American workers now run consistently above a 2 percent annual growth rate.

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• Canaccord Genuity reports an insider trading trend that is predominantly positive for junior gold mining stocks this year. This type of trading underpins confidence that the companies are undervalued. Two noteworthy companies with insider buying are Pilot Gold and Klondex Mines. This week, Pilot Gold reported additional high-grade mineralization intercepts at its Kinsley Mountain project. Klondex announced its entry into a toll milling agreement with a California-based producer, expecting to bring in additional cash flow as well as optimization to its Midas mill utilization. Klondex is also expected to release its Fire Creek Preliminary Economic Assessment shortly, which M-Partners’ analysts expect will show very robust economics and begin to close the company’s valuation gap to its peers.

Weaknesses

• Gold ETF investors have been sellers in April, as monthly outflows reach 516,000 ounces. Outflow days have outnumbered inflow days by a 2:1 ratio. According to UBS, this trading action contrasts with buying during February and March of 261,000 and 463,000 ounces, respectively. On the positive side, April selling is just shy of the inflows recorded in the prior two months, leading UBS analysts to believe the bulk of the selling is now done.
• Bloomberg reports that at least 40 unlawful prospectors have died in South Africa this year due to mines collapsing, workers dealing with poisonous gases, and gangs waging turf wars underground. The South African government estimates 14,000 people are now involved in illegal mining, which has aided the creation of a complex criminal industry. Legal operators are also falling victim to these illegal operators who steal equipment and mine on their prospective land.
• Turkey and Russia both cut gold holdings in March after increases during the previous month, according to data from the International Monetary Fund (IMF). Bullion holdings by central banks are closely watched since the group became net buyers in 2010, after two decades as net sellers. This selling highlights gold’s role as a backstop in times of crisis, with Russia likely swapping gold for foreign currency amid the threat of western sanctions.

Opportunities

• Newmont Mining and Barrick Gold reportedly held advanced-stage merger talks to bring together the world’s two largest gold miners. The negotiations called for a newly-merged company chaired by Thornton of Barrick Gold to hold the combined Nevada assets, along with other American assets. Additionally the negotiations called for a spin-off company (Spinco) to hold African and Pacific assets and chaired by Newmont’s Calarco. Interestingly, the proposed Spinco would hold nearly one third of the combined company’s production, making it the fifth-largest gold producer. Although negotiations have reportedly been halted, the transaction could add much needed dynamism to the gold sector by helping boost the merger and acquisition (M&A) space, along with refocusing the strategies of the global producers. On that note, Goldcorp has rescinded its Osisko offer in favor of the combined Agnico-Yamana bid, leaving it in a healthy position to pursue other M&A transactions this year. Potential acquisition candidates include Pretium Resources and Detour Gold.
• A study of gold forward rates and the investment cycle, signals that gold is at a major multi-year low, according to Ian Williams, CEO of Charteris Treasury Portfolio Managers. Williams asserts that inventories are falling rapidly at a time when replacement cost is $1,500 an ounce. In such an environment, it is clearly not possible for gold to trade below replacement cost for very long. Not surprisingly, the U.K.’s Financial Conduct Authority is considering adding bullion to its list of eligible investments for investors saving up for retirement. This move could give a boost to institutional and retail gold demand.
• RBC analysts upgraded Agnico Eagle to “outperform” following the pullback from the combined bid offer for Osisko. The analysts argue that in addition to the overall transaction being accretive to Agnico, the company deserves a premium over its peers. They note its strong 13-percent annual growth profile, its highly diversified and high-quality asset portfolio, along with its ability to generate substantial free cash flow at current prices. On a related note, Solitario Exploration and Royalty engaged SRK to complete a Technical Resource Report on its Bongara Zinc project in Peru. The Bongara deposit is undergoing an advanced technical evaluation by Votorantim, the Brazilian conglomerate, which will carry Solitario to production upon a positive Feasibility Study.

Threats

• China added Beijing as its third mainland gold import point, in a move that would help keep purchases secret if China (the world’s top buyer) opted to boost its official reserves. China does not release its gold trade data, leaving Hong Kong’s net export data to Shenzhen as the only reliable indicator of Chinese gold imports. The new import channel will aid China in increasing its gold purchases in a discreet manner, but may also relieve some of the pressure seen in Hong Kong as it funneled gold to satisfy China’s strong consumer demand.
• Gold fell to a 10-week low before recovering mid-week, as markets were concerned that a weaker Chinese yuan may force supply out of China. The weakness in the Asian currency mounted concerns that investors would be forced to unwind the 1,000 tonnes of the metal allegedly pledged as collateral for loans. However, the assumption that 1,000 tonnes are at risk of liquidation is likely overstated. A large portion likely ended up in the vaults of the central bank, with many more tonnes locked in commercial bank’s balance sheets under consumer gold-accumulation plans.
• The Chilean mining sector has raised concerns over the government’s proposed abolition of the DL600 tax provision that allowed firms with projects over $50 million to receive a negotiated, 10-year fixed corporate tax rate. According to Sonami, the private sector mining society, foreign miners have invested over $50 billion into the country over the past 30 years, largely incentivized by the DL600 provision. The abolition will make it increasingly difficult for miners to justify investments in the country at a time when production costs are challenging, and the permitting landscape is not clear.