Gold Investors Weekly Review – November 28th

In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,168.74 down $32.81 per ounce (-2.73%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 6.70%. The U.S. Trade-Weighted Dollar Index slipped 0.05% for the week.

Gold Market Strengths

Central banks have been under pressure in Europe to account for gold held abroad. The latest news comes from France, where Governor of the Bank of France M. Christian Noyer has been asked to comprehensively audit the nation’s gold reserves. Likewise, the Netherlands repatriated some of its gold in order to restore confidence in the central bank. The increase in proprietary holding of gold by central banks is positive for global gold demand.

India imported 102 tonnes of gold between November 1 and November 15, just 48 tonnes shy of its total imports for the entire month of October. This data reveals a robust physical demand for gold in the country. Furthermore, India is looking to remove its 80/20 rule this week in order to free up gold flows into the country while eliminating distortions in the flows.

Gold Market Weaknesses

Four companies, including Goldman Sachs Group Inc. and HSBC Holdings PLC, are being sued over claims that they conspired for eight years to manipulate precious metals prices. The lawsuits join the club of numerous other attacks on financial companies.

Chow Tai Fook Jewellery Group, a major jewelry retailer in Hong Kong, reported a decline in profit of 23 percent for the six months ending September. Sales of gold products accounted for a significant part of the decline, falling 41 percent.

 

Gold Market Opportunities

The chart below shows the profit margin of Klondex Mines versus a peer group of other gold miners. On the vertical scale plotted against the valuation, enterprise value, is assigned by the market for a given revenue base.  In the case of Klondex Mines, its revenue of $33 million for the third quarter was slightly less than Argonaut Gold and Alamos Gold with $37 million and $39 million, respectively, however Klondex’s value is $175 million while Argonaut and Alamos sport enterprise values of $505 million and $638 million, respectively.  Strikingly, however, is that Klondex is the only company to post significant profit margins in a tough gold environment.  Klondex is set to end the year with roughly C$50 million in cash, up from C$7.6 million from the first quarter 2014. Klondex should be a considerable outperformer moving into and throughout 2015.

Klondex-Mines-vs-Peers-Q3-2014

 

Gold Market Threats

SocGen is forecasting an average gold price of $1,100 per ounce in the first quarter of 2015. The bank believes robust growth in the United States will lead the Federal Reserve to raise rates faster than anticipated, leading to a continuation of the downtrend in gold.

Net bullish-dollar positions have reached a record of $48 billion as investors see an extension of the sharp rally in the dollar. A further rise in the dollar would be bearish for gold. However, the last time there was a net-long position to this extent was in 2009, which was shortly followed by a 17-percent decline in the dollar.

 

Credit spreads between corporate and government bonds have been on the rise, indicating investors are demanding a higher premium for parting with their money. The rise in spreads comes as a warning sign that liquidity, one of the largest drivers of the stock market rally in recent years, could be deteriorating.  Jack Ablin, with BMO Private Bank, noted that further deterioration would move their big market liquidity indicator into bearish territory, leaving only two of their five indicators (the economy and momentum) in bull mode.

Spread-Corporate-vs-Government-Bonds-2013-2014

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