Gold Investors Weekly Review – January 17th

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 $1,254.02, up $5.57 per ounce (0.45%). The NYSE Arca Gold Miners Index went 5.85% higher on the week. This was the gold investors review of past week.

Gold Market Strengths

Gold strengthened $5.60 this week, with its price increasing $48.40 per ounce so far this year. As the chart above shows, the yellow metal continues to form its technical double bottom and is now breaking away from the 50-day moving average. Normally, as U.S. economic prospects improve, gold retreats. However, so far this year the negative correlation between the dollar and gold is at the lowest since October of last year.

GOLD-50-day-Moving-Average-January_2014

Gold received a boost this week as a government report showed the cost of living in the U.S. increased by the most in six months, boosting gold’s appeal as a hedge against inflation. The consumer price index (CPI) rose 0.3 percent in December from the previous month, putting inflation back on everyone’s radar.

Gold Market Weaknesses

Mining companies continue to slash exploration expenditures as budgets tumble. The massive cuts in exploration in 2013 are being extended this year. Last year, exploration spending plunged by roughly $10 billion, or 30 percent, and may drop an additional 10 percent this year as major producers and junior explorers alike trim budgets, according to MinEX Consulting.

Colossus Minerals, a former star of the junior mining sector, announced it will seek creditor protection after failing to make an interest payment due at the end of 2013. The fall of this name was predictable earlier last year when its dewatering process proved unsuccessful. However, Colossus continued to be a component of the GDXJ ETF up until the latest rebalancing in December. This is yet another reminder for investors of the risks posed by passive gold ETFs and their stock selection lacking fundamental analysis.

Gold Market Opportunities

The U.K. Financial Authority gold price setting investigation has claimed its first casualty as Deutsche Bank announced it will withdraw from participating in setting gold and silver benchmarks in London. The bank justified the move as a means of scaling back its commodities business.

UBS sees platinum outperforming gold, pulled by higher economic growth in developed nations. The metal could see upward pressure in the near term as Lonmin Plc and Impala Platinum Holdings, two of the world’s largest producers, will start to receive strike notices after a South African union called for yet another stoppage.

Gold Market Threats

The Precious Metals Research team at BMO published a report that seeks to debunk some of the misconceptions about the outlook for the gold mining industry. According to the analysts, production is not likely to decline short term the way many have speculated, which will remove one of the positive supply tailwinds for gold. In addition, it asserts that companies will have a harder time cutting costs than is being assumed, and that the enforcement of the cost-cutting measures will be harder than it may appear.

Goldman Sachs’ Head of Commodities Research Jeffrey Currie remains bearish on virtually all commodities, but particularly on gold, reiterating his prediction of last year that gold will fall to $1,050 per ounce by the end of this year. Currie noted that not one commodity has a bullish supply story; not even gold after the recent cuts to exploration and development budgets across the industry.

The Indian Government on Thursday announced a hike in import tariff value for gold and silver. The import tariff value of gold was hiked by 3.83 percent, and that of silver was hiked by 3.92 percent, in tandem with the precious metal prices in the international market. The move shows the Indian Government sees no urgency to remove or decrease the import burden that led to a dramatic decrease in legal gold imports.

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