Gold Investors Weekly Review – December 5th

In his weekly market review, Frank Holmes of the summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,192.51 up $25.10 per ounce (+2.15%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.90%. The U.S. Trade-Weighted Dollar Index slipped 1.13% for the week.

Gold Market Strengths

Gold trading in China’s largest physical exchange is accelerating.  For the first ten months of 2014, the volume of contracts on the Shanghai Gold Exchange was 12,077 tonnes, compared with all of 2013 at 11,614 tonnes.

Klondex Mines announced a second toll milling agreement this week for its Midas Mill, where it has spare capacity. Klondex will process high grade ore, in excess of 1.5 ounces per ton from and pay the provider the value of the recovered gold less all toll milling charges.  Such deal structures are accretive to Klondex, which essentially is buying gold below the market price and processing it with a positive carry on the profit margin.

Gold Market Weaknesses

It appears that after January 30, 2015, benchmark gold forward offered rates (GOFO) will stop as there may not be enough banks willing to make a public market in setting the rate for borrowing costs.  After many of the banks have been exposed for benchmark manipulation at their customer’s expense, few want to hang their hat on a number.  The GOFO rates were important in that sometimes they signaled when the physical market in gold was difficult to source supply.

U.S. employment data released on Friday by the Bureau of Labor Statistics calculated the economy created 321,000 new jobs in November, 90,000 more than expectations and thus pushing gold below $1,200 for the close of trading this week.  Interestingly, ADP’s Employment Change report released on Wednesday came in at just 208,000 which was a miss versus the consensus estimate of 222,000.

Although the Swiss referendum on forcing the Swiss National Bank to return to sound banking versus running a hedge fund to manipulate markets based on political pressure failed to win the day, sellers tried to capitalize on the vote by sending gold down as low as $1,143 in European trading hours only to find buyers who then ran gold up to a high of $1,222, a $79 intraday swing before prices settled at $1,212.


Gold Market Opportunities

Tightening the supply demand balance for new mine production, China, the world’s largest producer, is forecast by the China Gold Association, to see its current 10 percent gold production growth rate to fall by 2015 as lower prices deter new capital deployments to grow production.

China’s central bank seems to view the current price levels in gold as opportunistic.  The Peoples Bank of China circulated a draft plan to further ease import restrictions on bringing gold into China.   Qualified miners, all banks that are members of the Shanghai Gold Exchange, and even commemorative gold and silver coin makers would be eligible to import bullion.  The move would hopefully cut the premium paid to direct gold imports to China and may encourage miners and refiners to seek opportunities outside of China to secure gold.


Gold Market Threats

Although India did scrap its 80/20 rule for the re-export of gold brought into the county, the country did not drop the 10 percent import duty on the gold price.  It is still unclear as to what will be the new plan for managing gold imports into India.

Although gold has rallied nearly $60 dollars per ounce over the last thirty days, Societe Generale SA believes gold is still in a downward trend as long as prices don’t climb above the $1,225 to $1,240 range, according to Stephanie Aymes, head of technical analysis at the bank in London.  Ms. Aymes believes the drop in gold prices should extend to $1,085 over the next three months, marking a 50 percent retracement from the 2011 peak in gold.  Interestingly, gold had a 50 percent correction in the 1970s prior to rallying to all new highs.


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