Gold Market Radar (November 18, 2013)
For the week, spot gold closed at $1,290.20, up $1.60 per ounce, or 0.12 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.34 percent. The U.S. Trade-Weighted Dollar Index lost 0.61 percent for the week.
Strengths
- Gold rose on Thursday after Federal Reserve Chairman nominee Janet Yellen spoke in testimony before the Senate. Yellen commented that the economy and labor market are performing far below their potential and pointed that large improvements must be made before the Fed reduces its unconventional asset purchase stimulus. The continuation of ultra accommodative monetary policies, together with Yellen’s dovish tone, is viewed as supportive of gold prices.
- Last week saw more action in the Comex warehouses, with a net gain in gold inventories for the week. However, registered gold stocks hit a new all-time low at a little under 639,000 ounces. The ratio of registered Comex gold inventory also hit a new low, reiterating the impending physical delivery shortage. In China, demand volumes for cash gold on the Shanghai Gold Exchange climbed to a one-month high this week, leading traders to cover some their short positions early in the week. In addition, the U.S. Mint sold 764,500 ounces of American Eagle coins as of November 8, compared with 753,000 ounces in all of 2012, according to data on the mint’s website.
- Platinum Group Metals reported assay results from drilling on the Waterberg extension property, delivering better than estimated results. The holes intercepted Super F (3 to 5 meters wide) mineralization grade and average true thickness of 11 meters. Grades of 3.03 grams per tonne platinum, palladium and gold were recorded over 10.5 meters. According to Leon Esterhuizen of CIBC, the value added through drill bi at present is enormous and will attract attention from bigger players in the space. Klondex Mines announced that Barry Dahl has been appointed Chief Financial Officer effective Friday November 15. Dahl comes from Argonaut where he acted as CFO for the last four years. Prior to Argonaut, Dhal served at two successful ventures which include Andean Resources, sold to Goldcorp, and Meridian Gold, acquired by Yamana Gold.
Weaknesses
- Barrick Gold’s recently announced $3 billion bought deal equity raise did not go all too smoothly. Reports of one-third of the deal being hung, rapidly circulated through both buy and sell-side traders. Part of the relief may have come from an unexpected announcement by the Company revealing that Peter Munk, founder and co-chairman of Barrick’s Board of Directors, intends to retire by the Company’s annual general meeting next spring. Investors have been critical of Munk over his most recent actions, which included the purchase of Equinox Minerals, eventually written down by $4 billion, as well as the granting of an excessive signing bonus for a new member of the board.
- Hedge funds cut bullish gold bets late last week, adding the most short contracts in four weeks, as U.S. economic growth fuels speculation that the Fed will trim stimulus. Gold’s negative price reaction to the possibility of a December Fed tapering indicates that the bullion market is likely to remain sensitive to expectations for changes in monetary policy, according to Howard Wen of HSBC. Short bets jumped 37 percent, the most since October 15.
- Ed Yardeni, in his daily commentary this week, thinks that there are lots of grey shades in the latest batch of global economic indicators as well as in the stock market’s reaction to them. For one, U.S. GDP growth isn’t “red hot” as initially believed. When excluding inventory build-ups, real final sales in GDP increased by only 2.0 percent, shy of the headline 2.8 percent. Yardeni adds that real final sales to domestic purchasers rose just 1.7 percent, following a gain of 2.1 percent during the second quarter. All that glitters is not gold, as they say.
Opportunities
- Bloomberg published a brief exhibit this week highlighting that China’s buying and holding of gold has increased contango to $134 per ounce on the five-year futures contract, from $94 over the course of six months. This is because the gold moved from London gold ETP liquidations to China during 2013 may no longer be available should ETP demand return. China has been the world's largest buyer of gold this year, and it is widely known that gold going into China is not expected to hit the international market again. This is due to the country’s view of gold as a long-term investment, leading traders to increase contango as a result.
- In regard to China’s physical demand, a gold vault capable of storing 2,000 metric tonnes, or twice the amount of China’s expected demand this year, opened in Shanghai and is seeking to benefit from rising physical demand in Asia’s largest economy. The facility is a massive vote of confidence for the Chinese gold market, according to Philip Klapwijk of Precious Metals Insights. In addition, recent World Gold Council data shows that China’s demand for gold jewelry, bars and coins rose 30 percent, while gold usage in India rose 24 percent, adding that the bulk of year-to-date growth in consumer demand came from eastern markets. Both Klapwijk and two Bloomberg research analysts have come to the conclusion that the People’s Bank of China (PBOC) has taken 300 tonnes of gold into reserves in the first half of the year, just under 15 percent of global supply. The key highlight of the report is that the conclusion was reached independently. At such a massive rate of accumulation, China could match or even surpass U.S. gold reserves within the next 10 years.
- In his Friday commentary, David Rosenberg of Gluskin Sheff gave his take on Yellen’s Senate testimony. According to Rosenberg, Yellen not only pointed towards endless quantitative easing (QE), she also indicated that the Fed will consider lowering the meager 0.25 percent it pays for bank deposits to kick start a more vigorous credit cycle; the era of free money is alive and well, he asserted. The result of Yellen’s nomination, and impending ratification, is that liquidity will remain friendly and will fuel risk appetite for the foreseeable future, implying that investors will be punished for at least another five years of decay, if they are overweight cash underneath Yellen’s mandate. In essence, Rosenberg summarizes to borrow short and lend long and start going long hard assets since we will come out of the other side with inflation.
Threats
- Despite an expected solid underpinning from industrial demand for silver prices, the possibility of the Fed tapering its stimulus, along with the resulting weakness in gold, should send silver tumbling, according to Thomson Reuters. Thomson Reuters’ analysts add that the rising physical demand for the metal will not be enough to sustain prices when faced with the unwinding of the massive U.S. government QE program, and the stronger U.S. dollar. Despite this opinion, it is necessary to highlight that the 2011 record of 39.869 million American Silver Eagle bullion coin sales was shattered this Tuesday as the U.S. Mint revealed sales of 40.175 million coins sold so far this year.
- Colossus Minerals provided a corporate, operational and financial update this week. In the update, the company announced that underground water problems remain persistent and that targeted initial production had to be pushed out to the second quarter of 2014 from year-end. As a result, multiple directors have resigned and the company’s financial condition continues to weaken. The combination of ongoing technical and financial issues, along with questions regarding its ability to source additional capital, have led analysts to believe that the risks of investing in Colossus Minerals exceeds the potential rewards during this time. Despite completing a $38 million financing on August 13, Colossus ended the third quarter of this year with just $19 million in cash and negative working capital. According to Joseph Fazzini of Dundee Capital Markets, the $19 million in capital are deemed to be an insufficient amount to resolve the company’s technical issues and finance the company through to a production stage.
- Turquoise Hill Resources Ltd announced its plan of a rights offering of up to $2.4 billion, due to the uncertainty regarding the timing of when permits will be awarded by the Mongolian government. The remaining issues to be finalized in the ongoing discussions between Rio Tinto and the Government of Mongolia pertain mainly to the sharing of economic value of the project and the clarification over initial capital expenditure. The Memorandum of Agreement stipulates that in the event that Oyu Tolgoi project financing funds are not available to repair $2.4 billion in commitments by year end, Turquoise Hill will be forced to launch a rights offering. The exercise will be highly dilutive on a per share basis.
