Gold Market Radar (December 23, 2013)
For the week, spot gold closed at $1,203.30, down $35.50 per ounce, or 2.87 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 2.70 percent. The U.S. Trade-Weighted Dollar Index gained 0.43 percent for the week.
Strengths
- Virginia Mines closed at a new 52-week high today, a remarkable feat for any gold company in a bear gold market. TerraX Minerals, partially owned by Virginia Mines, completed a new private placement to finance drilling at Northbelt, which encompasses 3,562 hectares on the prolific Yellowknife belt, 15 km north of the city of Yellowknife, and covers 13 km of strike on the northern extension of the geology that contained the Giant (7.6 million ounce) and Con (5.5 million ounce) gold mines. Earlier this week, Ralph Aldis, portfolio manager for the World Precious Minerals Fund, highlighted Virginia Mines in an interview with The Gold Report provided his opinion that the company has an unmatched exploration upside and is a “junior miner that will let you sleep at night.”
- Klondex Mines reported gold assays at its Fire Creek gold deposit in Nevada from surface drilling. The drilling suggests possible extensions of the current mineral resource model. Grades from surface drilling range from 16.3 grams per tonne to 5.1 grams per tonne gold. The intercepts support the view that the Fire Creek project is significantly underexplored.
- Comstock Mining announced the positive restructuring of four mining lode claims in the company’s Dayton Resource. The transaction eliminates $2 million of debt and cancels all future royalties payable with respect to the relevant mining claims in exchange for the issuance of one million shares of the company’s common stock. The transaction strengthens the company’s balance sheet by extinguishing debt, increasing free cash flow, and enhancing future shareholder value by eliminating the 3 percent net smelter return (NSR).
Weaknesses
- Gold slid more than 2 percent on Thursday to its lowest since late June after the U.S. Federal Reserve took a baby step away from its ultra-loose monetary policy. Gold trading in the next few days will be essential to determining the longer term market reaction to the news. Commerzbank, in a note to investors, commented that “if the gold price should succeed in forming a stable and long-term bottom at above $1,220 per troy ounce, investor interest is likely to pick up again – after all, the considerable uncertainty over QE3 is gone, meaning that the spectre of 'tapering' has lost its ability to scare the gold market.” Meanwhile, physical gold buyers waiting in the wings for a bargain-hunting opportunity in China, the world’s largest bullion market, have decidedly become buyers as evidenced by a 10-week high spike in volumes at the Shanghai Gold Exchange this Friday.
- Two weeks after Barrick Gold announced a shakeup of its board, two of the company’s independent directors announced their resignations. In addition, the company said two additional directors would not stand for reelection. The sudden news indicates a high level of dysfunction within the board of the world’s largest gold miner. It has been known that Canada’s biggest pension funds pushed for the company to elect new independent directors, yet the timing of the reorganization leaves much to be desired, with the company taking too long to effect the changed demanded by shareholders.
- China launched its third gold-backed exchange-traded fund (ETF), but, like its predecessors, the fund struggled to garner assets as investors in the world's biggest bullion-using country show a preference for the physical metal. The E Fund Gold ETF began trading on Monday, and according to state media, it raised approximately $82.5 million. Reuters interviewed local analysts who believe the muted response to “paper” gold in China shows that investors there prefer owning physical gold assets.
Opportunities
- BCA Research in its weekly Commodity & Energy Strategy report showed that despite the tapering announcement, it will be difficult to see an acceleration of gold bearishness over the medium-term. According to the report, the fact that the Fed wants to put space between tapering and rate hikes means that real yields and the dollar are unlikely to rise significantly. Similarly, the “lopsidedly bearish” positioning in the gold market is likely to support a rebound rather a continuation of the negative trend with the four-week moving average of bullish sentiment at a twelve-year low, net speculative long positioning at a nine-year low, and ETF holdings at a three-year low.
- Primero Mining agreed to purchase Canada’s Brigus Gold for about $208 million in a stock transaction. The price represents an approximate 45 percent premium over the trailing 20-day average price for Brigus. The premiums offered in other recent transactions reveal the deeply oversold levels of junior miners: Asanko Gold is to acquire PMI Gold at a 79 percent premium, and both B2Gold’s acquisition of Volta, and Centamin’s acquisition of Ampella Mining were done at premiums over 100 percent of their respective trading prices. As evidenced by the recent mergers and acquisitions activity; we continue to be of the opinion that the cheapest resources are listed, and that a new wave of M&A activity may be imminent.
- Mandalay Resources announced the purchase of the Challacollo project in Chile from Silver Standard. Challacollo hosts indicated mineral resources of 3.4 million tonnes with an average grade of 170.6 grams per tonne silver for 18.6 million ounces of contained silver and an inferred mineral resources of 23.6 million ounces of contained silver. The purchase price of $16.5 million in cash and shares roughly values the in-situ producing ounces at $0.50 per ounce, which is fairly cheap. It is pleasing to see that Mandalay management was able to make an accretive acquisition in Chile, especially given the success they have had with Cerro Bayo.
Threats
- With gold nearing its June lows, it is likely reserve write-downs imply further charges at year end, says Deutsche Bank. Having seen the recent price action, it is timely to review the underlying assumptions in determining their gold and silver reserves sensitivity. Deutsche Bank is not optimistic, as average gold and silver assumptions are tracking about 15 percent and 35 percent, respectively, above today's spot rates and indicate the possibility for further multibillion dollar write-downs on the horizon. Past conference calls have offered an idea into the sensitivity of reserves. Newmont management stated in its first quarter 2013 call that a $100 per ounce decrease in gold price assumed would lead to a 7.6 percent decline in reserves, while Goldcorp’s fourth quarter 2012 call discussed a $150 per ounce decrease would cause reserves to fall 6 percent.
- In recent weeks, there have been concerns among market participants and regulators that the process for establishing the price of gold may lend itself to insider trading and other forms of unfair dealing. According to Rosa M. Abrantes-Metz, an adjunct associate professor at New York University’s Stern School of Business and a director in the antitrust, securities and financial regulation practices of Global Economics Group, a consulting company based in New York, there may be evidence of price manipulation going on. Her study shows that in commodity analyst Dimitri Speck’s book “The Gold Cartel,” the author finds that the spot price of gold tends to drop sharply around the London evening fixing (10 a.m. New York time). A similar, if less pronounced, drop in price occurs around the London morning fixing. For both commodities there were, on average, no comparable price changes at any other time of the day. According to Abrantes-Metz, these patterns are consistent with manipulation in both markets.
- According to Simon Weeks of Scotia Mocatta, despite overnight trading being quiet just ahead of the Fed taper announcement on Wednesday, ETF inventories continued to sail into record redemptions. Total Global ETFs holdings are currently losing 82,000 ounces per calendar day which is nearly double the rate seen in October and November.
