Gold Futures Tumble as Physical Sales in China Rise Ahead of Chinese New Year
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
Posted Feb 3, 2014
Each week, our investment team gathers the top events from a variety of sources about the precious metals market. To help investors made informed decisions, we categorize the summary in terms of strengths, weaknesses, opportunities and threats. Here is the SWOT for the week:
Physical sales for gold rose 51 percent in China during the month of December, ahead of the gift-giving season of the Lunar New Year on January 31. Chow Tai Fook, the largest jewelry retailer in China, surged 26 percent in the three months through December, as the gold price drop reduced the cost of its inputs. Similarly, Austria’s mint is running 24-hour shifts as global mints from the U.S. to Australia report climbing demand for the metal. Meanwhile, the global security services company Brinks, is getting ready to open its fifth gold vault in Singapore to profit from gold’s movement from the West to the East.
Teranga Gold announced that its full-year 2013 production reached 207,204 ounces, meeting the higher end of its production guidance, at all-in costs of $1,033 per ounce, near the lower threshold of guidance. In addition, the company provided encouraging guidance for 2014 as it expects production of 220,000 to 240,000 of gold, at all-in costs below $900 per ounce. The stock has massively outperformed its peers over the last month as the recent results come on the back of a $135 million streaming deal signed with Franco-Nevada.
Three bought deals in the junior gold space were announced this week, a sign that insiders are confident that the current cycle will continue to strengthen. True Gold Mining is raising C$36.6 million (Canadian dollars) for development and construction of the recently permitted Karma deposit in Burkina Faso. Similarly, Lydian International is raising C$15 million to advance its Amulsar project in Armenia, while Dalradian Resources is raising approximately C$12 million to advance its high-grade Curraghinalt deposit in Northern Ireland.
On January 30, gold futures tumbled the most in six weeks after a report showed the U.S. economy expanded 3.2 percent in the fourth quarter. This boosted speculation that the Federal Reserve will continue to scale back monetary stimulus.
German inflation continues to surprise to the downside, this time slowing in January. The surprise is partly explained by a decrease in Euro-denominated oil prices that drove both fuel and heating prices lower-than-expected. The situation in the rest of the eurozone is similar, which in effect reduced both retail and institutional appetite for gold.
Newmont Mining’s rating was lowered to “underperform” at Royal Bank of Canada, as the company’s 2014 production guidance fell materially below expectations, with costs slightly higher. The lower guidance may be a result of the industry’s troubles in meeting previous targets. According to Cosmos Chiu of CIBC, the industry today is projecting modest production growth of only 9 percent, compared to an average of greater than 20 percent in the past decade.
Comex gold stocks eligible for delivery are at all-time lows, continuing to fall rapidly. J.P. Morgan withdrew a massive 321,500 ounces from its vaults last week, the largest withdrawal of physical gold ever, according to Lawrence Williams of Mineweb. Comex’s last report shows that delivery-eligible inventories are currently sitting at a very modest 70,000 ounces, or 2.2 tonnes. At the rate of current outflows, there will be no physical gold left to back the paper contracts.
Dundee Precious Metals hosted a site visit to the company’s Tsumeb smelter in Namibia. Despite a lower smelting capacity hurting performance in 2013, about 70 percent of the operating costs at the smelter are fixed and, as such, should improve as throughput increases and the operation becomes better established, according to BMO. With the large amount of work done to-date, there appears to be comparatively fewer items on the to-do list, which should translate into better operating performance in upcoming quarters.
H.C. Wainwright initiated coverage on Pretium Resources with a buy rating and a 12-month price target of $11. According to Jeffrey Wright, Pretium’s Brucejack project is a textbook example of what a large-scale, high grade mine should look like. The timing is opportunistic to establish a position ahead of the revised feasibility study, he noted. Pretium also has the potential for a takeout given the very few, large-scale projects of low technical risk in North America.
The fixed-income research team at Deutsche Bank believes that the gold price could face a tug-of-war between macro headwinds from Fed tapering on one hand, and robust physical buying and safe-haven demand on the other. On balance, the analysts at the bank argue that the end of central bank balance sheet expansion, and a broad-based rally of the U.S. dollar, is likely to resume downward pressure on gold prices.
South Africa’s Association of Mineworkers and Construction Union rejected a 9 percent wage increase offer on Thursday from leading platinum producers, prolonging a week of industrial action. The strike is currently affecting around 40 percent of the global supply of platinum. Gold producers in the country, which were at risk of facing strikes, have been shielded from such acts as a court ruling blocked the attempted strike action.
In a commentary from Gluskin Sheff’s David Rosenberg, Rosenberg compared the reported U.S. inflation reading to the implicit inflation in owner’s-equivalent rent. According to the commentary, if one were to replace the imputed rent measure of the consumer price index with the actual transaction price measure of owner’s-equivalent rent, the inflation would be 5.3 percent today, not 1.7 percent as per the “official” government number that has convinced many people that deflation is but a heartbeat away.
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Jan 31, 2014
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 12/31/13: Dalradian Resources, Dundee Precious Metals, Franco-Nevada, Newmont Mining, Pretium Resources, Teranga Gold and True Gold Mining.