Gold Market Radar (May 28, 2012)
For the week, spot gold closed at $1,573.03 down $19.96 per ounce, or 1.3 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, surged 7.88 percent. The U.S. Trade-Weighted Dollar Index gained 1.37 percent for the week.
Strengths
- Gold stocks strongly outperformed gold bullion this week. As we have highlighted in the past there has been a significant disconnect between the price of gold and equity share prices. The latest Canaccord Genuity Junior Mining Weekly highlights that one year ago, bullion was making new highs week-over-week with the price of gold rising up to $1,508 per ounce. Based on Canaccord’s in-situ gold database, the market was valuing gold held by non-producers at about $129 per ounce. One year later, while the price of gold is trading higher at $1,590 (5.4 percent higher than one year ago); the average in-situ value per ounce has dropped to $62 (52 percent lower than one year ago). The junior miners have been put in the penalty box as capital markets have temporarily shut off the financing lifeline to these companies.
- With the S&P 500 now giving up more than half its gains for the year, much of the surge in gold stock buying over the past week came from generalist funds that may be diversifying in an uncertain market. Another factor driving this buying may have been insider buying at the gold mining companies, which has recently soared according to the Market Ink Report. The Market Ink Report notes that the stars may indeed be aligning for gold stocks as the eurozone faces the prospect of a full-blown banking crisis potentially taking hold over the next few weeks. That would force the European Central Bank to provide further monetary easing.
- Despite gold being down this week it did get a lift in value as the International Monetary Fund (IMF) reported that central bank buying in gold was still proceeding at a brisk pace in April. Turkey raised its reserves by 29.7 tons and Ukraine, Mexico and Kazakhstan also increased their holdings. The Philippines, whose purchases actually date back to March but were slow in being reported to the IMF, reported gold purchases amounting to 32 tons of bullion--the biggest volume since Mexico bought around 78 tons a little over a year ago.
Weaknesses
- Feedback from the recent Bank of America Merrill Lynch 29th Global Metals, Mining and Steel conference in Miami showed there was very little interest in attending a gold company presentation, which could in itself, be interpreted as a buy signal. Michael Jalonen, of BofA/ML noted he came to the conference with high hopes for news flow on capex reduction and a focus on capital returns but ultimately left feeling a little disappointed.
- Before a mining company has even applied for a permit for the Pebble Project Assessment in Alaska, the EPA stepped in and released its own report. The EPA issued a heavy three-volume report on the possible impact of mining projects on the Bristol Bay watershed system but the agency insisted, “the draft study in no way prejudges future consideration of proposed mining activities.” The U.S. Corps of Engineers is the primary permitting authority for dredging and filing permits for mining projects. However, Senate Energy and Resources Committee Member Lisa Murkowski, R-Alaska, and others noted the EPA is determined to wrestle the mining permitting authority for itself, using the power it believes was granted by the Clean Water Act.
- Indian retail gold demand has been poor as the rupee has fallen significantly in value due to inflation and this has made gold more expensive in local currency terms.
Opportunities
- Ray Dalio was interviewed by Barron’s recently. Dalio is one of the most successful hedge fund managers in the world, overseeing $120 billion in assets. Dalio was asked if he is still a fan of gold. Dalio noted it could be a bumpy ride temporarily because Europeans will have to sell gold in order to raise funds because they are squeezed but recommended that most people should have in the vicinity of 10 percent of their assets in gold, not only because he thinks it will be a good investment longer term, but because he thinks it is a very effective diversifier against the other 90 percent. He also explained that he is viewing gold as an alternative currency. “The big issue is debtor-developed countries, the U.S., Europe and Japan, all have a lot of debt and will have to print money or they will have credit problems. I don’t want to have all of my money in those currencies.”
- Technical studies by Institutional Advisors show that the Philadelphia Stock Exchange Gold and Silver Index (XAU)/Gold Ratio has hit an extreme reading of less than 25 and such lows have only been seen around the important lows of September-October 2008, October-November 1948, the double bottom of March and October 1942 and June 1924. Their work indicates these types of readings have historically marked turning points in the relative performance of gold versus the gold stocks and the current readings support stronger gold stock prices.
- Chris Wood, in his latest Fear and Greed report, said that gold has been acting like a risky asset lately, and it is only a matter of time before it resumes its safe haven status. In the near term, so long as there are investors who own gold on leverage via ETFs or futures, there is always the risk of gold correcting further in a classic deleveraging trade. But in the long run, gold is the only real hedge against both deflation and hyperinflation. The ongoing experiment in unorthodox monetary policy from Western central banks will not end well. While rising energy costs have hurt gold companies’ profit markets, CLSA says that with U.S. crude oil inventories rising, rising gold and falling oil prices are “a perfect ‘combo’ for gold-mining shares.”
Threats
- Don Coxe noted there is essentially a backroom political ban on investing in companies deemed impure by environmental NGOs and this is unfairly depressing the prices of some of the leading gold mining stocks, and hurting pension funds. Coxe says pension funds are succumbing to political pressure, resulting in “more and more corporate pension funds…being impaled on their own funding swords due to inadequate investment returns.” Coxe suggests that commodity stocks are “victims of a new form of persecution from two groups--those with contempt for capitalism, along with those who resent what mining and oil and gas companies do for a living.”
- To stop the development of several new mines that are being contemplated in Minnesota, a couple of NGOs recently went on the offensive to highlight that sulfide mining presents many more risks to their environment than traditional iron ore mining that has taken place in their state and the citizens need a broad conversation about this issue.
- The Canadian mining industry is seeing a couple of headline risks this week with the Teamsters strike, which shut down Canadian Pacific Railway freight lines early Wednesday with no end in sight. This leaves mining and other resource companies in Canada faced with supply and fuel disruptions. Also, forest fires in Canada have surfaced as a problem as some power lines to the mines have been damaged while other areas are shutting in to make sure air quality underground is free of smoke.
