Gold Market Radar (May 12, 2014)
For the week, spot gold closed at $1,289.10, down $10.52 per ounce, or 0.81 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 2.37 percent. The U.S. Trade-Weighted Dollar Index rose 0.43 percent for the week.
Strengths
- The People’s Bank of China has approved the bourse to set up an international board in the Shanghai free-trade zone, thus allowing foreign institutions and individuals to trade gold on the exchange. The measure is expected to make it easier to bring gold into the country, where strong physical demand remains robust, as evidenced by gold consumption in China increasing slightly from last year. However, jewelry purchases rose 30.2 percent over the same period, highlighting the importance of what we call the “love trade,” which represents nearly 80 percent of all Chinese demand for gold.
- Global open interest for palladium is up 401 thousand ounces year to date, or 18.4 percent, leading to a spike in palladium ETF holdings to an all-time high. This is particularly significant, since the market is set to record a major deficit this year, which has sent prices up 16 percent from the lows in early February to new 32-month highs above $800 per ounce. In addition, Impala Platinum announced it may reduce its PGM supply by 60 percent over the next three months as it remains unclear how long the platinum strike might last.
- Mandalay Resources reported higher first-quarter production and lower costs, reflecting the rapid scaling up of the mines. The company also reported planned expansions at both mines are on time and on budget, and declared a quarterly dividend. Roxgold encountered high grade mineralization as part of its ongoing drilling program at Bagassi South in Burkina Faso, with intercepts as high as 226.76 gram per tonne gold over 3.1 meters. Trevali Mining reported newly discovered mineralization approximately 450 meters below the currently defined resource at the Caribou project in New Brunswick.
Weaknesses
- UBS recommends selling gold on any price rallies, arguing bullion lacks the incentives to push higher, and more importantly, to maintain its “elevated perch.” The bank’s analysts added that recent gains were aided by “nervous shorts.” Similarly, Goldman Sachs argues gold’s recent gains are a result of transient factors, implying prices are expected to grind down from here.
- Gold prices slid this week as signs of an improving global economy reduced the appeal of haven assets, according to a Bloomberg report. The U.S. trade deficit narrowed in March, with exports growing the most in nine months, while the Purchasers Managers’ Index for the eurozone climbed to 53.1 in April from 52.2 the previous month.
- Dick Poon, general manager at Heraeus Metals in Hong Kong, expects China’s gold demand to be muted in the coming months, thus keeping prices at current levels. In Poon’s view, 2013 was an exceptional year, evidenced by large physical delivery premiums, which have subsided in 2014. Poon argues the level of buying last year will not be repeated as consumers bought forward in 2013 after the price drop.
Opportunities
- The downturn in gold exploration will hit future gold production. Michael Chender of Chender’s Metals Economics Group, one of the foremost researchers into mineral exploration trends, has presented gold exploration statistics that are likely to impact gold supply going forward. According to Chender, not only have exploration expenditures declined 33 percent year-over-year, but exploration activity by juniors was hit harder as funding dried up. Overall, Chender expects exploration spending to drop an additional 20 percent this year, with most of the decline coming from cuts to grassroots exploration.
- Kevin Kerr, editor of CommodityConfidential.com, is of the opinion that a downside in gold bullion is very limited, and not taking a long position at this stage is “somewhat foolish.” It would appear that Dundee Capital Markets’ chief economist Martin Murenbeeld agrees. According to Murenbeeld, one of the more prescient gold forecasters, gold is likely to end 2014 at $1,367 per ounce, before climbing to $1,438 in 2015.
- De Beers, the largest diamond supplier, has announced its plans to raise diamond prices 5 percent per annum until 2016, as it projects a return on capital of 15 percent for its operations. On a related note, Lucara Diamonds reported first-quarter results, beating analysts’ profitability expectations, and closing the quarter with a large net cash position of $56.8 million. In addition, the company announced its maiden semi-annual dividend.
Threats
- Gold traders are the most bearish in seven weeks as we head into next week, with the majority of them citing the developments in Ukraine and the continued cuts in U.S. stimulus as reasons to hold or sell bullion. Similarly, speculators have argued mounting confidence in the U.S. economy as a reason to lighten their long gold bets.
- Randgold CEO Mark Bristow has criticized the proposed mine code change in the Democratic Republic of the Congo (DRC) as it may curb investment. The proposed changes seek to raise taxes and royalties from miners, cut exemptions and institute a windfall-profit tax. Miners in the country stated they could consider a tax increase as long as the country provides them with reliable power to run their operations. The DRC is currently in an electricity-rationing program amid a power shortage that is unlikely to be reversed in the short term.
- The Office of the Inspector General announced it will commence a preliminary investigation to determine whether the U.S. Environmental Protection Agency (EPA) violated laws, regulations, policies and procedures in its assessment of mining impacts in Alaska. A pre-emptive veto by the EPA against the Bristol Bay Watershed has raised serious questions over its independence. Previous, numerous controversies have surrounded the EPA, especially those where green group lawsuits against the EPA have resulted in changes to regulations. This strategy has been criticized as a go-around process to circumvent the legislative process and enact regulations that would have otherwise failed in congress.
