Gold Market Radar (October 9, 2012)

Gold Market Radar (October 9, 2012)

For the week, spot gold closed at $1,780.60 up $8.50 per ounce, or 0.48 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 0.07 percent. The U.S. Trade-Weighted Dollar Index fell 0.75 percent for the week.

Strengths

• This past week, gold prices hit a new high for the year following a couple of weeks of consolidation around $1,770.  Although it is still early in the month, we have not seen much in terms of profit taking since the rally started in August.
• Senior gold stocks were flat for the week with mid-tiered gold plays putting in a slight gain, but silver stocks were the strongest, climbing almost 2 percent on average.
• Gold held in exchange traded funds reached a new record high and sales of gold and silver coins by the U.S. Mint were very robust in September.

Weaknesses

• South African gold mining shares traded on average 4.8 percent lower over the course of the week.  The Chamber of Mines and the unions reached agreement on a one-page framework document that may provide the common ground needed to get the gold miners back on the job.
• Labor relations may not be progressing as smoothly for the platinum miners.  Anglo American Platinum dismissed 12,000 workers for participating in the illegal strikes at the company’s operations and some fear this could lead to escalated violence.
• A small silver lining to the labor problems in South Africa is that the rand fell 5.7 percent over the last week.  Should the currency continue to fall, the profit margins of the miners should expand, perhaps nullifying some of the wage increases being sought.

Opportunities

• Pretium Resources reported a number of new high-grade gold intercepts from recent drilling at the Valley of the Kings zone at Brucejack.  Highlights include concentrations of gold ranging from 260 ounces per tonne to 32 ounces per tonne over some relatively narrow intercepts, but certainly economic.  Importantly, the continuity of the deposit is being proven up and the structure is now known to extend for 800 meters and is still open to the east, west and at depth.
• Rob McEwen, CEO of McEwen Mining and a former CEO of Goldcorp, was interviewed on Mineweb and stressed that now is a great time to buy gold stocks due to their underperformance relative to bullion during the debt crisis.  Rob noted that the message sent by shareholders to management regarding properly running a mining company has been heard loud and clear.
• India has seen a resurgence in gold buying as the rupee has regained some of its value, lowering the local gold price. In addition, the Indian stock market has surged, creating more confidence for spending.  India, traditionally being the largest gold buyer, has seen falling gold purchases for most of the year. Should there be a turn in India’s gold purchases, it would be supportive of higher gold prices.

Threats

• As we mentioned last week, a strong move in the gold price was still missing two things – China and India.  While it looks like we are getting somewhat of a turnaround in India’s gold appetite we really haven’t seen a turn in its stock market yet.  The Shanghai Composite Index rallied in the last couple of days, but we have not seen a major policy announcement such as QE3 in the U.S. to get the market going yet.
• As a reminder, gold demand in China during the second quarter was 145 tonnes, down 43 percent from the first quarter.  Retail Chinese gold buying picked up during the recent Golden Week holidays with some retailers seeing sales pick up by close to 60 percent.
• While it is too early to see meaningful improvements in the management practices at mining companies from growing the size of the company versus the profits, as discussed at the Denver Gold Forum last month, we still remain cautious going into earnings reporting season this October.  On average, you don’t get good news when gold companies report, partly due to a historical lack of focus on delivering profits. Hopefully, all the bad news will be put out and companies will get down to the business of delivering profit growth going forward.