Gold Market Radar (July 9, 2012)
For the week, spot gold closed at $1,583.75 down $13.65 per ounce, or 0.85 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.70 percent. The U.S. Trade-Weighted Dollar Index surged 2.03 percent for the week.
Strengths
- Turkish banks are shoring up their reserve base by pouring their technical expertise and marketing resources into offering their customers gold deposit accounts. For cultural reasons gold is big business in Turkey which has had experience with bouts of high inflation over the past century. Customers can deposit their gold in the bank and can make withdrawals from their accounts in gold bars or the lira currency. In addition, gold accumulation accounts can be set up where the customer makes monthly purchases of gold. In September 2011, the central bank increased the ration of lira reserves that could be held in the form of gold from 0 to 10 percent, raising it further to 20 percent in March 2012 and 25 percent last month. This had the effect of significantly increasing the banks’ desire for taking in gold deposits.
- China’s Ministry of Industry and Information Technology released data that showed the country’s gold output for the year so far, rose 6.59 percent year-over-year to 140.7 tons. However this suggests that the world’s largest producer’s pace of increase in output over the last five months could be declining, although it is still too early to call a trend. Monthly production data for April and May showed a slowdown in production from the first 3 months of the year.
- One of Greece’s largest construction companies, Ellaktor SA, noted after its annual meeting that with the Halkidiki Mines obtaining a gold mining license, this was very positive and will likely result in the implementation of a significant investment plan in the coming years. Ellaktor anticipates the friendly takeover of European Goldfields by Eldorado Gold Corporation should result in some significant new business for the company and speaks well of the permitting process going forward for Eldorado.
Weaknesses
- ISI’s Weekly Economic Report listed 197 simulative policy initiatives announced around the world in the past 10 months which have yet to create a self-sustaining recovery. David Rosenberg of Gluskin Sheff noted recently that profits are contracting for the first time in three years and corporate guidance is decisively negative. The ratio of negative to positive pre-announcements has actually risen to 3.5x--the highest since the third quarter of 2001.
- Harmony Gold suffered a minor setback when a judge in South Africa ruled that even though Harmony had sold one of its gold mining operations to a company that later went bankrupt it was still responsible for any environmental liabilities even though those liabilities had been transferred to the new owner.
- Pan American Silver’s Navidad project in Argentina was essentially rendered uneconomic under a newly proposed law in the province of Chubut in Argentina. Much like the Ecuadorian plan laid out by its government for the development of the Fruta del Norta deposit, the government wants what is essentially greater than 50 percent of the economic profits.
Opportunities
- Stifel Nicolous Canada, in a recent gold industry update, noted that China gold imports from Hong Kong, a proxy for gold buying activity in the country, decreased to 2.4 million ounces in May (from 3.3 million ounces in April). Although May imports decreased significantly on a month-over-month basis, they are still up seven-fold year-over-year, and we expect them to increase as we enter into the seasonally strong August to December period for gold prices (Indian weddings, Christmas and Chinese New Year). We believe gold imports will continue to surge based on our thesis of increasing appetite for gold as newly wealthy Chinese citizens seek to diversify domestic economic and political risk through hard assets. We would not be surprised by more gold purchases by the Chinese government for diversification from the U.S. dollar and now in particular, the Euro. The environment, (negative real interest rates worldwide including planned, sustained low-interest rates in the U.S. through 2014, ballooning sovereign debts, and Europe debt problems) remains positive for gold prices. We continue to believe that gold prices could increase to $2,000 per ounce by 2013.
- Martin Murenbeeld pointed out in his weekly piece that gold continued to make headway as a financial asset: It appears that the Federal Deposit Insurance Corporation (FDIC) may have taken up the discussion along with the Bank for International Settlements (BIS) to reclassify gold as a risk-free asset for bank capital adequacy ratios. This would essentially zero risk-weight gold along with cash and direct claims on the U.S. government. Slowly but surely gold is reentering the financial arena in an official capacity.
- In an interesting slant, Kazakhstan is planning to add a third gold refinery by year-end 2013 so it will have enough capacity to ensure the Central Asian country can refine all the gold the country produces for supply to the central bank and will not need to ship some of its gold out of the country for refining by Switzerland. Not only does Kazakhstan not want to place its gold at risk by being outside of it control, the country plans to raise its share of gold in its gold and foreign currency reserves to 20 percent from 14-15 percent. Officials further elaborated they were cutting their exposure to the euro in favor of gold.
Threats
- After substantial pressure from Congress, the SEC said it would meet on August 22 to publically vote on two sets of rules, which are arguably the most controversial under the 2010 Dodd-Frank Wall Street reform law. The conflict minerals rule would require companies to disclose whether they use tantalum, tin, gold or tungsten from the Democratic Republic of the Congo. The other rule would require oil, gas and mining companies to disclose payments they make to the governments. The delays have been fueled by a bitter dispute between human rights groups who say the rules will help reduce corruption and companies who say they will be too costly and difficult to implement. As proposed, companies would need to identify if any conflict minerals are used in their products and trace back the origins of said minerals through their supply chain, which would be very costly to implement.
- The president of Nicaragua will propose changes to the country’s mining laws as part of a package of constitutional reforms to be presented to Congress for debate on July 16. The proposed mining law change says “the state reserves the right to acquire up to 40 percent of all extraction businesses. The state will be able to become a shareholder in all companies that extract natural resources.” Guatemala’s mining chamber is pushing for the government to scrap the plan, claiming it will hurt mining development in the Central American country. But a top presidential adviser who helped draft the reform, said the government was moving forward with the plan, which had so far received more support than criticism.
- Market Cutifani, CEO of AngloGold Ashanti, commented that Australia’s tax policies are more of a worry to his company than calls within South Africa’s ruling party to nationalize mines and impose more duties. “It’s clear at the senior-levels of the ANC there is no appetite for nationalization.” Essentially, the South Africans understand there will be no mines if the economics don’t work. Cutifani pointed out that recent Australian tax policies have been draconian toward the mining industry. As of July 1, iron ore and coal companies in Australia making more than AUD$75 million in annual profits must pay an additional 30 percent “Minerals Resource Rent Tax” An AUD$23 per ton carbon tax on emissions also took effect the same day and applies to all businesses. Even a single six pack of beer in the grocery store will run you upwards of AUD$25.
