Gold Market Radar (September 17, 2012)
For the week, spot gold closed at $1,770.75 up $35.10 per ounce, or 2.02 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 6.62 percent. The U.S. Trade-Weighted Dollar Index slumped 1.76 percent for the week.
Strengths
- The turn to higher prices in the gold market has been a welcome relief from the despair many were feeling during the summer doldrums.
- Bernanke’s Fed has come through on a new quantitative easing program that is open-ended, which should provide a new floor for gold prices. In addition, there will be a push to keep interest rates very low and the Fed has suggested the punch bowl of stimulus will not be taken away early even if the economy appears to be turning around.
- Generalist and fast money players have shunned the precious metals sector since the February highs with a zeal that has now turned to a grimace as they consider buying back their positions.
Weaknesses
- Even in a great gold market you shouldn’t buy just any stock that has been knocked down. Great Basin, which previously fell by about 50 percent a month ago, tumbled another 65 percent this week as it announced it would suspend operations at its Burnstone mine due to an inability to continue to fund operations.
- The West African nation Ivory Coast announced it will increase taxes on gold miners operating in the country. Perseus Mining’s grow plans to put its Ivory Coast Tengrela Gold project into production could be put on hold pending the resolution of the tax issue.
- The document outlining the rationale for the increase in taxes stated, “The price of gold, which was around $300 per ounce in 2002, is today above $1,700, or practically a six-fold increase without any comparable increase in production costs.” For those mining companies that espouse to investors that their “cash cost” to produce an ounce of gold is, for example, $400 with $1,200 margins at $1,600 gold, take notice. The only people that believe these metrics are governments! Presently, the all-in cost to produce an ounce of gold is running closer to $1,375.
Opportunities
- Both the Denver Gold Forum and the Precious Metals Summit took place over the past week. Despite the rise in gold prices, investors were guardedly optimistic on their outlook, versus euphoria which leads to runaway prices.
- The mood for acquisitions was very strong by the companies that are in a position to acquire cheap assets, but there are few sellers to accommodate them. We expect that deals will get done and this should be an extra boost for those companies with desirable assets that make sense to put into production.
- There was discussion at the World Gold Council meeting held in Denver that companies may move away from quoting “cash cost” numbers to produce an ounce of gold. After all, this was a non-GAAP metric that was invented to hide the fact that gold companies did not make any profits when gold prices were depressed. Better transparency for investors will be good for the industry. In addition, companies emphasized the need to refocus their priorities on growing their profitability versus the number of gold ounces produced.
Threats
- Conflict with labor unions continues to be a problem in South Africa. This has largely impacted the platinum miners, pushing up the price of platinum and palladium, but some of the gold companies are being impacted, too.
- With the drought of equity financings over the last six months, be prepared for some companies to come to the market to raise money. There certainly are some quality projects that should be funded and make economic sense, but be wary of just investing in any deal that comes along. Investors were shocked when their $9.50 investment in NovaGold Resources back in February traded down to $3.68 per share in August.
- In addition, profit taking is always a concern. In the next two weeks, everybody will be watching to see if the gains in gold and in the equity prices can be maintained. The arguments for staying long are extremely compelling because the woes of the economy cannot be fixed in any magical way. If no correction takes place in the near term, caution would still be appropriate after the closing of the September quarter.
