Gold Investors Weekly Review – December 27th

In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. The price of the yellow metal went lower after two consecutive weeks of gains. Gold closed the week at $1,212.93, up $9.63 per ounce (0.80%). The NYSE Arca Gold Miners Index went 4.21% higher on the week. This was the gold investors review of past week.

Gold Market Strengths

India’s Commerce Ministry has asked to ease the restrictions on the import of gold, imposed by the Reserve Bank of India (RBI), in an effort to control the rising current account deficit. In a letter to Economic Affairs Secretary, Commerce Secretary S. R. Rao asked him to “look into the matter” and issue necessary instructions to the RBI for the removal of the anomaly. The move would relieve jewelers who have been reeling from the government induced gold import curbs. So far, the government has responded with a bid to relax some of the conditions currently imposed on the import of gold ore by refiners, with the aim of kick starting India’s waning gold refineries, which have been operating at only 25 percent of installed capacity. Official sources have argued that the nation’s current account deficit has compressed significantly since the introduction of the import curbs, so this can be read as a first step in reducing the import duty on gold.

The German Bundesbank announced it has transferred 37 tons of gold back from New York and Paris to its Frankfurt vaults. Bundesbank President Jens Weidmann said the transfer was prompted by new a Bundesbank storage concept to hold gold in Frankfurt, and not because of concerns over its availability. However, Germany’s Federal court concluded in 2011 that the nation’s gold holdings overseas weren’t regularly checked, which prompted the initiation of plans to bring back a total 700 tons previously in deposit with the Fed and the Banque de France. As a Zero Hedge article points out, procuring physical gold seems to be a rather problematic and time-consuming process, as the Bundesbank is learning.

Platinum futures jumped the most in 10 weeks on speculation that a global economic rebound will boost demand for the metal used for pollution control devices in cars. Platinum reached a two-week high on Friday in the most active trading of the session. A recent Bloomberg survey shows the price of the precious metal is expected to rally to $1,650 an ounce in 2014 as consumption surpasses output. Demand exceeded supply this year by the most since 1999 and the continuation of the synchronized global economic recovery will likely lead to an even greater shortage in 2014.

Gold Market Weaknesses

Gold is set to post its biggest annual loss in more than three decades as rallying U.S. equities and optimism about a synchronized global economic recovery lowered its safe haven appeal. The near 30 percent slump in 2013 ends a 12-year rally prompted by rock bottom interest rates and rapidly expanding central banks’ balance sheets. The mood remains bearish among generalists who expect prices to drop further next year. Several brokerages such as Goldman Sachs, BNP Paribas and Societe General have gold price targets below $1,150 in 2014. Physical demand, which climbed to peak levels this year, has shown it can provide support on the downside, but it has failed to drive prices higher. Silver is down just under 35 percent for the year, its worst annual performance since at least 1981.

Gold Market Opportunities

Capital Economics argues the precious metal could come back into favor in 2014. “The consensus is that the price of gold will grind lower in 2014, at best, as the support from loose U.S. monetary policy gradually weakens,” said Julian Jessop, head of commodities research at the firm. “In contrast, with investor sentiment already so heavily negative, our view is that the risks for the coming year are firmly skewed to the upside.” According to Jessop, the latter half of 2013 suggests the worst of the slump may be over. Indeed, during this period, gold prices staged a partial recovery, rising to $1,400 before dropping back to current levels around $1,200. Jessop added that that next year, a re-emergence of eurozone instability, and the Fed’s continued asset purchase program, could work to boost gold prices. Although the Fed has announced a small taper, it will still be pumping large amounts of stimulus into the economy through most, if not all, of 2014. “We are happy to reiterate our view that the price of gold will revisit $1,400, at least, in 2014, and probably go higher,” Jessop concluded.

GOLD_price_vs_Fed_balance_sheet_2000_till_2013

The metals analysts at J.P. Morgan think it is easy to look at the cost of new mines and conclude that current prices are unsustainable. In addition, JPM analysts assert that on Wall Street the question of future inflation is a when, and not if, proposition. With central banks around the world still printing money at a furious pace, a debasement of the value of their currencies is forthcoming. As a result, the J.P. Morgan team thinks now is the time to look hard at gold and silver as hedges, especially given the golden opportunity created by the recent downturn in prices. The motivation is that contrarian investing has paid off big for patient investors, and it can pay off even bigger when the whole world is negative on the asset class, such as gold at present time. Just a few short years ago major homebuilders traded in the single digits, while banks and brokerage firms got clobbered in 2008. The recovery in those sectors has paid off handsomely. With gold, once inflation finally kicks in after years of currency printing, the patient gold investor may again have his day in the sun.

Metal and crop prices are poised to rebound in 2014 as accelerating economic growth boosts demand, according to a Bloomberg story. Average annual prices for 15 of 23 non-energy commodities from aluminum to sugar will be higher than now, according to estimates from as many as 26 analysts compiled by Bloomberg. Corn, silver and gold dropped the most in 2013. “It’s a good time to come into commodities,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. “This is the first time in the recovery that we’ve had simultaneous positive and accelerating growth in the U.S., Europe, Japan and the emerging world all at the same time. Economic growth may not be enough to end the slump. Silver, after posting the biggest loss of any precious metal, will rise as much as 28 percent in 2014 to $25 an ounce on spot markets, according to the median of 40 estimates. Gold will gain 20 percent to $1,450, based on 59 estimates. On the bearish side, Jeffrey Currie, Goldman’s head of commodities research in New York said there will be “significant” declines through next year for iron ore, gold, soybeans and copper. He added that gold will slide to $1,110 an ounce in 12 months.

Gold Market Threats

A Financial Times article this week speaks to the crisis of confidence in the mining sector. According to the report, the number of new mining listings in Canada, where roughly 70 percent of all mining equity finance is raised, plunged fuelled by a steep decline in metal prices. Up until the end of November, 62 companies had listed on the Toronto Stock Exchange or the TSX venture exchange, compared with 129 by the same point in 2012 and more than 200 in both 2009 and 2010. The amount of equity raised in Toronto has also fallen from $10.3 billion in the whole of 2012 to just $6.5 billion by the end of November. Almost half of this year’s total to date came in November when Barrick Gold, raised $3.1 billion of fresh equity.

According to David Rosenberg of Gluskin Sheff, wage inflation is a key source of upside risks to growth in 2014, and that is not on the radar screen. The recent Beige Book had abundant anecdotal evidence highlighting job shortages on high-skill trades. Rosenberg estimates that out of the 115 million people currently employed in the private sector, roughly 40 million of them are going to be reaping the benefits of a higher stipend. With the Fed still consumed with deflation fears, and job firings already 20 percent below 2007 levels, Rosenberg argues that inflation is likely to surprise to the upside. In such an environment, gold is likely to regain strength on the basis of its hedging qualities. In addition, the areas of consumer spending that showed the greatest positive sensitivity to periods of rising wage growth include jewelry and electronics; sectors that may provide incremental demand for both gold and silver.

 

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