Gold Market Radar (May 11, 2013)

Gold Market Radar (May 11, 2013)

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For the week, spot gold closed at $1,448.20, down $22.55 per ounce, or 1.53 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.47 percent. The U.S. Trade-Weighted Dollar Index rose 1.24 percent for the week.

Strengths

• At the risk of sounding like a broken record, there is yet more evidence of the unprecedented demand for physical gold. Christopher Wood in his Greed & Fear report this Thursday notes that Chinese gold imports from Hong Kong in March more than tripled from a year ago, from 62.9 metric tons to 223.5 metric tons. Similarly, India is heading for its second-straight month of 100 plus metric tons of gold imports according to the Bombay Bullion Association. There is only one way to view this data, and it is bullish for gold.
• Franco-Nevada announced that it has acquired a 1.2 percent NSR royalty on Pretium's Brucejack project for $45 million. The royalty covers both the Valley of the Kings and West Zone and becomes payable after approximately 500,000 ounce. The investment by Franco-Nevada is certainly a vote of confidence in the project and serves to remind investors that there is value in junior mining stocks.

• Timmins Gold reported first-quarter results this week; the company’s operating earnings beat analysts’ expectations reflecting strong gold sales and lower than forecast costs.With production ramping up in the course of the year and a decline in capital expenses as the drilling season ends, the company is in a strong position and will likely see rising free cash flow and cash balances through the remainder of the year.

Weaknesses

• India’s silver imports slid 80 percent in 2012 and have continued falling in 2013. Despite producing sizable silver, unlike gold where the country is totally import dependent, the fall in demand is almost fully attributed to a decline in purchases for investment purposes, according to data from the All India Gem and Jewellery Trade Federation. Unlike gold which attracted massive physical buying after its historic fall mid April, silver has failed to garner any buying interest in India.
• Investors pulled $8.7 billion from gold exchange traded products (ETPs) globally in April, Blackrock's data showed, after bullion plunged half-way through the month. It appears the strong demand for coins, bars, and jewelry has not been enough to arrest the levels of institutional selling. In fact, ETP investors are net sellers into May, which Ole Hansen, head of commodity strategy at Saxo Bank, continues to attribute to institutional accounts. Wealth managers have been rotating out of commodities and into high-dividend equities and bonds as they look for yield.
• Despite having unbundled some of its labor-intensive, wildcat strike-prone mining assets earlier in the year, Gold Fields reported earnings per share 5 percent below estimates and 66 percent lower than last quarter. Production from the company’s mines came in 11 percent below last quarter at 477,000 ounces, making the once controversial split even more unappealing to investors.

Opportunities

• Drew Mason of St. Joseph Partners noted in his Weekly Gold Review how equity investors are holding on to the single most negative viewpoint on gold in the market today, which is that central banks are on the verge of ending their money printing and again becoming responsible. However, the first days in May brought a broad amount of economic data which showed how weak the economy continues to be. At some point the consensus will remember the Fed has repeatedly broken its exit promise.  The view will shift from the Fed “will be exiting QE any minute now” to the realization the Fed is trapped and cannot exit which should be very positive for the metals.

• The question on when is the right time to step into the gold market and pick up stocks has been asked too frequently. The quantitative analysts at GMP Securities provided an interesting view this week. When the ratio of gold bullion to gold stocks is falling, it means gold stocks are appreciating at a higher rate than bullion, and that is exactly when you want to be in stocks. The ratio of gold relative to stocks as measured by the HUI Index has been rising constantly since early 2011 and is now at 5.65. From a statistical standpoint, the current level is above the two standard deviation level—despite the current gold weakness—implying a correction is imminent. During the correction you want to be long gold stocks.
• Peter Schiff, outspoken author of The Real Crash, permanent bear, and head of Euro Pacific Capital, is now an official gold supporter. On Friday Schiff released a video stating that the same unprecedented negative sentiment in the space will provide the “wall of worry” gold needs to climb back. In his opinion, he is now convinced the fundamentals have never been better for the yellow metal as the pace of currency debasement only accelerates, regardless where you are looking at.

Threats

• This month, the South African Chamber of Mines will sit down with unions to hammer out its next set of wage agreements. Despite recent questioning of the role of unions by workers themselves, who are worried that leadership has lost touch with its members, the National Union of Mineworkers spokesperson asserts they are prepared to fight for double-digit figure raises, leveraging on their opinion that companies acted in bad faith following negotiations last year. Costs have increased to a point where further, significant wage hikes are just not an option if the sector is to stay above water.
• The province of Quebec has defined the new hybrid royalty tax model applicable to mining companies. The levy will require producers to pay the greater of two amounts: a royalty on output, also deemed the minimum mining tax, or a tax on profits, deemed the progressive mining tax on profit. Minimum taxes will range from 1 percent to 4 percent depending on the size of the project, and profit taxes will range from 16 percent to 28 percent. Although the plan appears less damaging than initially thought, it adds pressure at a time when falling metal prices have already cut into the tight margins in the mining sector.
• The Colombian government has officially postponed a highly anticipated auction for 50 million acres of strategic mineral concessions. Thom Calandra reports that mining regulators in Colombia appear to need more time to gather information about the properties, which were to have gone to bid later this year. Other properties, known as concession applications, which have long been delayed, appear thus far not to be at risk of postponement.