Gold Market Radar (August 12, 2013)
For the week, spot gold closed at $1,314.40, up $2.65 per ounce, or 0.2 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.61 percent. The U.S. Trade-Weighted Dollar Index lost 0.96 percent for the week.
Strengths
- Gold futures jumped the most in two weeks as the dollar weakened, increasing demand for the metal as an alternative investment. The chart below shows the contrast between the Shanghai Gold Exchange (SGE) and the COMEX. Despite the volume traded on the COMEX dwarfing that of the SGE, it is clear that as far as deliveries of physical metal are concerned, the first is solely a paper market and the latter is a real market for physical gold. As it stands, more and more market participants are beginning to focus on Shanghai to measure real demand for bullion.
- Platinum gained the most in more than 13 months following reports of exports rebounding in Germany and China, while Northam Platinum Ltd, which operates the worldâs deepest platinum mine in South Africa, warned that strike action as a result of deadlocked wage talks will impact operations. The signs of improving demand coupled with supply concerns make platinum very attractive. Similarly, silver futures contracts rose significantly on COMEX as the U.S. Mint reported American Eagle Silver Bullion coins experienced their best July ever with a whopping 93.4 percent increase over July 2012 sales.
- B2Gold issued an exceptional second-quarter earnings report with gold production for the second quarter totaling 82,083 ounces. The company also reported better-than-expected operating cash costs, while establishing the carrying value of its long-lived mining assets at June 30, 2013, required no write-downs. In addition, the company increased its reserve estimates at its Masbate Mine from 3 million to 3.23 million gold ounces at an improved grade of 0.97 grams per tonne. Lastly, the company upgraded its gold production guidance for 2013 to between 395,000 to 420,000 ounces compared with the earlier production forecast of between 360,000 to 380,000 ounces. On a different note, Randgold Resources saw a 62 percent drop in quarterly profit attributable to lower gold prices. However, the company reduced cash costs per ounce by 5 percent in the second quarter relative to the first quarter, which helped turn it into one of only four gold companies to post a profit in the second quarter so far according to Bloomberg.
Weaknesses
- Gold investments on exchange-traded products dropped $30.9 billion this year through July, BlackRock said. Gold outflows totaled $2.6 billion in July, extending redemptions of $4.3 billion in June. BlackRock argues the continued modest inflation readings have lessened goldâs appeal as an inflation hedge.
- South Africa released its latest figures on the countryâs metals and mineral output showing gold and platinum continue on the decline. The reading is fairly dismal, considering the African nation once had the worldâs dominant gold mining sector. Gold production was down 14 percent year-over-year and is now only the countryâs fourth most important mined metal. In terms of global gold output, South Africa has been slipping down from the worldâs top producer less than a decade ago to number six. Back in 1970, South Africa produced almost 80 percent of global gold production; now it manages only around 6 percent.
- Chinaâs net gold imports from Hong Kong fell 4.8 percent in June as the government curbed the use of bullion in financing deals as part of its liquidity tightening measures. Traditionally, gold has been used in the commodity-finance trade, which was a popular way of taking advantage of the higher interest rates in mainland China relative to Hong Kong. Gold has also been used to back foreign-currency loans from banks in Hong Kong, using the cash to purchase yuan on the mainland in a form of arbitrage. The recent tightening has made these activities more complex, thus reducing their volume.
Opportunities
- Australiaâs ANZ Bank is the latest to open a gold vault in Singapore. Other recent vault builders there include Deutsche Bank and JP Morgan, while Switzerlandâs Metalor has one under construction. The new gold vault openings evidence the continued flight of gold from West to East. It appears Western bullion banks have misjudged the power that gold retains in the global psyche and as a key financial instrument, especially to Asian buyers. A recent statement by Yao Yudong of the Peopleâs Bank of China Monetary Policy Committee calling for a new system to manage international liquidity is another indication that China is moving toward abandoning the U.S. dollar hegemony. In the future, China may look toward a hard asset backed currency to negotiate, a move that would certainly bode well for bullion.
- Gold is set to gain as output languishes on spending cuts, according to the World Gold Council. Spending cuts by producers and the closure of costly operations will tighten supply in the global market. In trying to estimate mine production for the remainder of the year, it appears gold production will be flat and could even fall this year. Among many others, Barrick Gold, the worldâs largest producer, said it may sell, close or curb output at 12 mines from Peru to Papua New Guinea where costs are higher. On the demand side, China is expected to surpass India this year as the worldâs largest consumer of bullion, adding pressure to an already tight physical delivery market.
- The TSX Venture Exchange intends to retire a number of temporary rules on August 31, in an effort to adapt to a new capital markets environment, according to Mineweb. The exchange said it will not allow under five-cent private placements, but that it has other measures in mind to make it easier for juniors to meet the regular financing rules, especially those that relate to stock consolidations. With the new policy, the TSX Venture would let juniors do consolidations without shareholder approval when the share-ratio therein is 10:1 and less. Juniors will still have to comply with provincial securities laws, but it will give juniors a way to meet the TSX Ventureâs regulations while avoiding time-consuming, expensive procedures.
Threats
- Many of the world's gold miners are struggling to keep their heads above water at current gold prices. One of the main reasons is the fact that mines are old and the replacement ounces that are being found are of much lower grade. A recent Mineweb study shows grades have indeed fallen significantly. For instance, grades in the South African gold sector fell from an average of 4.3 grams per metric ton in 2002 to an average of 2.8 grams per ton in 2011.
- The Federal Reserve should reverse a decade-old ruling that lets banks trade physical commodities, Commodity Futures Trading Commission member Bart Chilton said. Banks including Citigroup, JPMorgan Chase and Morgan Stanley were permitted to expand into commodities markets under a Fed decision, according to Mineweb. The central bank said last month that it is reviewing the policy amid Senate scrutiny of whether such involvement allows Wall Street firms to influence prices. The conflict of interest is evident given that the 10 largest Wall Street firms reaped about $6 billion in revenue from commodities in 2012, according to analytics company Coalition Ltd.
- Gold was put under pressure from the release of better-than-expected U.S. nonmanufacturing data at the beginning of the week. The ISM nonmanufacturing index rose to 56.0 in July from 52.2 in June, largely beating the median forecast of 53.1 from a Bloomberg survey. According to HSBCâs U.S. economist Ryan Wang, the ISM nonmanufacturing business activity and new orders indexes both increased sharply, indicating steady growth in economic activity. Following the reading, Dallas Federal Reserve President Richard Fisher commented that the Federal Open Market Committee (FOMC) is now a step closer to withdrawing from its quantitative easing (QE) program.
