Gold Market Cheat Sheet (May 30, 2011)
On Friday, spot gold closed at $1,536.42, up $24.12 per ounce, or 1.59 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 4.61 percent. The U.S. Trade-Weighted Dollar Index lost 0.78 percent for the week.
Strengths
- Gold in euro terms reached a new all-time high of €1,080 per ounce on Monday as several unnerving developments occurred in Europe over the weekend that spooked investors. Standard & Poor’s lowered its outlook on Italy’s credit rating, Spain’s ruling Socialist political party suffered its worst ever defeat in regional elections, and government bond yields on Greek debt spiked to fresh all-time highs.
- Utah has now made official the use of gold and silver coins as legal tender. This marks the first time since 1971 that any government entity in the United States has legalized the use of gold and silver as currency. The law, signed by Governor Gary Herbert, does not require citizens to pay or accept payment in gold or silver, but rather offers an alternative to the fiat-based Federal Reserve note. The Utah law will also exempt the sale of gold and silver coins from state capital gains taxes.
- The Associated Press noted that earlier this month, “Minnesota took a step closer to joining Utah in making gold and silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted.”
Weaknesses
- Indonesia will audit more than 8,000 existing mining permits to make sure they are in line with mining and environmental laws. The announcement came days after the country passed new regulations on environmental protection. President Susilo Bambang Yudhoyono last week signed a two-year moratorium on permits for logging and another decree allowing underground mining in protected forests if conditions such as an environmental assessment had been met. The rules were softer than expected by environmentalists and it was not clear if the audit of permits would lead to any cancellations. Indonesia had already stopped issuing new mining permits ahead of mining regulations stemming from a 2008 law.
- Without increased domestic exploration, significant declines in U.S. mineral production are unavoidable as reserves are exhausted, said House Subcommittee Chairman Doug Lamborn. In his testimony, Hal Quinn, the CEO of the National Mining Association, observed that while the U.S. “has one of the world’s greater mineral repositories, our ability to get these minerals into the supply chain to help meet more of America’s needs is threatened. Numerous public policies have placed high hurdles in our lane of the global race to remain competitive.”
- Among the hurdles referred to by Quinn are restrictions on federal land access, as well as the struggle of U.S. mining “under the world’s highest statutory taxation rate.” Quinn also objected to decade long U.S. regulatory hurdles, particularly permit delays that he asserted “pose the highest hurdle for domestic mining. If commodity cycles are historically 20 years in duration, the 10 years it takes to obtain permits leaves U.S. mining still in the starting blocks with the race half way over.”
Opportunities
- Chinese gold demand could rise over 22 percent in the next three years and sharply outpace domestic production, the head of the country’s largest state owned gold miner China National Gold Group said, signaling room for a strong ramp up in imports. Gold production should reach 400 tons by 2014, a gain of nearly 19 percent from 2010, but consumption is set to grow by nearly a quarter to 700 tons.
- Investors are closer to being able to use gold as a trading security after a European parliamentary committee approved a proposal to allow clearing houses to accept gold as collateral. “It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of gold make it an ideal form of high quality liquid collateral,” said Natalie Dempster, director of government affairs at the World Gold Council.
- Chinese investors are focused on using gold as a protection against rising consumer prices. Unlike paper currencies, gold retains its value when prices increase. That has prompted many Chinese investors to flock to the precious metal. Also, for those who say gold has no industrial use, the World Gold Council reported that amidst a weak global economy, gold saw record demand from the technology sector of 326 tons or $13 billion.
Threats
- South Africa’s National Union of Mineworkers said it would seek a 14 percent rise in salaries from gold and coal miners in upcoming wage talks. There is no date yet for the talks, but the current deal expires June 30.
- Ecuador expects to obtain higher royalties from copper, gold and silver mines operated by United States and Canadian companies in the Andean country, Natural Resources Minister Wilson Pastor said. “The law requires a 5 percent royalty and we are going to go higher,” Pastor said at a news conference. The government expects $7 billion in mining investments over the next seven years from the mining projects in southern Ecuador.
- South Africa’s highest court ruled that ex-miners can seek redress from companies that operated under an apartheid-era system to use cheap black labor in the world’s deepest mines. While the ultimate number of claims and their size is impossible to determine, mining companies may face a liability of as much as $100 billion, Leon Esterhuizen, an analyst at RBC Capital Markets. “The whole risk really depends on whether these people putting these claims up can prove negligence by the mining companies,” he said.
