Gold Market Radar (October 15, 2012)
For the week, spot gold closed at $1,754.50 down $26.10 per ounce, or 1.47 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 3.80 percent. The U.S. Trade-Weighted Dollar Index gained 0.41 percent for the week.
Strengths
- In the gold space the only area of strength this week was in the South African gold stocks, which rose modestly following a more aggressive fall in the prior week due to labor issues.
- The repeal of a 7 percent tax on investment-grade gold and other precious metals brought into Singapore became effective October 1. Singapore is hoping to expand its trade in bullion, convince trading houses to store bullion with them and perhaps lure precious metals refineries to their country. This is all part of bigger push within Asia to store wealth in assets that have maintained their purchasing power over time.
- Billionaire Carlos Slim’s third-largest holding, Frisco, announced it will acquire the Ocampo Mine for a total cash consideration of $750 million. Ocampo has underperformed analysts’ expectations due to underlying labor problems which have hurt its productivity.
Weaknesses
- Members of South Africa’s biggest union rejected a proposal by gold producers to raise wages in a bid to end a wave of strikes. About 41 percent of South Africa’s gold output is idled, including all of AngloGold’s mines. Two Gold Fields sites were halted after workers walked out without heeding resolution procedures set out by labor laws.
- President Jacob Zuma said the mining strikes are having a “significant” impact on an economy already struggling to cope with Europe’s debt crisis. The National Treasury estimates that total production lost in platinum and gold mining as of the middle of September was about $518 million.
- Disruptions at South African gold mines, which collectively represent the world’s fourth-largest gold producer, have probably cut world gold supply by 2.5 percent according to Deutsche Bank.
Opportunities
- Insider buying in resource stocks is showing a positive trend. The latest insider stock trade reports compiled by Ink Research show that corporate executives and directors are buying 2.7 times as many stocks as they are selling in the basic materials sector, ranking it among the most undervalued sectors on the TSX. According to Ink Research, such readings tend to support increasing prices within a sector and may bode well for further gains this year.
- Bill Gross stated that a number of recent studies have concluded that “The U.S. balance sheet , its deficit and its ‘fiscal gap’ is in flames and that its fire department is apparently asleep at the station house.” In a white paper titled “Gold-The Simple Facts” posted on Pimco’s website, Pimco analysts Nicholas J. Johnson and Mihir P. Worah also said some interesting things, including, “Our bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies.”
- RBC’s precious metals team noted they are seeing evidence that suggests we may have reached a turning point where capital spending is curtailed and as a result we are seeing signs that inflation is easing in the mining space. Capital estimates in 2012 are up 23 percent over 2011 and 40 percent over 2010 levels and now stand at $200 per ounce of gold-equivalent production over the life-of-mine. RBC believes two thirds of proposed projects require a gold price of $1,500 per ounce to generate an after-tax IRR of 20 percent in the current cost environment. They recommend investors focus on gold companies with quality assets and the ability to grow through manageable, fully funded capital programs such as Dundee Precious Metals, among others.
Threats
- October is normally one of the weaker months for gold prices. Most of the momentum in gold prices has waned for the last three weeks after the open-ended QE3 announcement.
- Fred Hickey, who publishes the “The High-Tech Strategist,” recently noted that The Hubert Gold Newsletter Sentiment Index, which had been wallowing in negative territory recently, soared to levels that would be consistent with past corrections in prices.
- In addition, we have noted that a number of analysts on the street are now starting to raise their gold price targets after the upward move in gold to new all-time highs.
