Gold Market Cheat Sheet (March 28, 2011)
For the week, spot gold closed at $1,429.75, up $10.84 per ounce, or 0.76 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 5.07 percent. The U.S. Trade-Weighted Dollar Index moved slightly higher, up 0.62 percent for the week.
Strengths
- The gold price rose to a record $1,447 per ounce, as unrest in Libya and the Middle East and Portugal’s possible $100 billion bailout spurred demand for the precious metal.
- Last week, the Utah legislature passed a bill allowing gold and silver coins to be used as legal tender in the state, according to the true value of the metal in the coins and not by the face value stated on the coin. Similar proposals have been developed in Colorado, Georgia, Indiana, Iowa, Missouri, Montana, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont, and Washington.
- In India, standard 24-carat gold coins have been selling extremely well at more than 466 post offices throughout the country. Despite the high price, Indian consumers have been buying small quantities of coins to give during the festival season.
Weaknesses
- The Association of Mining & Exploration Companies (AMEC) reiterated its opposition of Australia’s Minerals Resource Rent Tax. AMEC’s chief executive said it was extremely disappointing that concerns of member companies have not been considered by the federal government. “Suggestions by Treasurer Swan that the industry has agreed with the Minerals Resource Rent Tax are incorrect, as agreement was only reached with three large multi-national multi-commodity conglomerates and not other junior-tiered mining companies that will be affected by this additional tax.”
- The Las Vegas Review-Journal reported that Assemblywoman Peggy Pierce will introduce a bill that will cap the value of legally deductible expenses at 40 percent, which could cost the state’s mining industry more than $2 billion in tax deductions.
- Nevada State Senate Majority Leader Steve Horsford asked the Nevada Tax Commission to embark on an emergency rule-making proceeding that he hopes will fix the “inconsistencies” and “loopholes” that exist in Nevada’s net proceeds of mines tax law. Rather than changing Nevada’s Constitution or removing the cap on net proceeds tax limits, Horsford seeks amendments to current allowable deductions for operating costs, salaries, employee recruitment costs, marketing, and converting minerals into money. The Nevada lawmaker would also eliminate deductions for consulting services, and, ironically, mine reclamation costs, which Horsford says should not be deducted because Nevada tax law did not provide for mine reclamation deductions.
Opportunities
- Texas Representative Ron Paul has scheduled an April 1 hearing of the U.S. House Subcommittee on Domestic Monetary Policy to examine the bullion programs at the U.S. Mint. Last week Paul introduced H.R. 1098, the Free Competition in Currency Act of 2011 that would repeal legal tender laws in order to prohibit taxation on gold, silver, platinum, palladium and rhodium bullion. The Coin Modernization, Oversight and Continuity Act of 2010 gives the U.S. Mint greater flexibility in meeting the demand for bullion coins as well as meeting the demand for gold and silver which Paul’s bill would change.
- Goldman Sachs said it forecast gold prices rallying to a record $1,480 an ounce in three months on declining U.S. real interest rates. The bank said it still expects gold prices to reach a peak in 2012 as U.S. interest rates are set to rise as the economy continues to recover. Goldman has a six-month gold view at $1,565 an ounce, and a 12-month forecast of $1,690 an ounce.
- In a bubble, market players seek to supply the market with as much as they can possibly sell at inflated prices. The price of gold has quadrupled in the past ten years and the gold industry struggles to sustain new mine production of bullion at the same level it was in 2001.
Threats
- Even as gold miners report stronger cash flows and good profits, costs are increasingly becoming an area of concern and some worry about the impact costs will have on capital expenditure. Miners are worried that capital spending on new projects will become unmanageable as labor, steel and energy costs keep pushing higher.
- On top of that, gold miners have suffered as the Canadian dollar, Australian dollar, Chilean peso and Mexican peso strengthened against the U.S. dollar (sales of most miners are typically denominated in U.S. dollars, while costs are often based in local “commodity” currencies).
- Mining executives at the Reuters Global Mining and Steel Summit noted that countries threatening to seize a bigger share of mining returns risk alienating investors and adding another layer of expense to an already increasing cost line.
