Gold Investors Weekly Review – January 3d

In his weekly market review, Frank Holmes of the 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 $1,236.90, up $23.55 per ounce (1.94%). The NYSE Arca Gold Miners Index went 3.17% higher on the week. This was the gold investors review of past week.

Gold Market Strengths

Despite net Chinese gold imports through Hong Kong falling below the 100-ton level in November, Chinese net gold imports remain on track to reach well over 1,100 tonnes in 2013. That is almost double the amount imported in 2012. According to figures by the Shanghai Gold Exchange, total gold imports through Hong Kong and throughout other routes may be in excess of 2,000 tonnes.

Domestic and international demand has been strong for both gold and silver. The U.S. Mint started 2014 with strong sales of gold coins, extending last year’s sales strength and representing a 14 percent increase year-over-year. On January 2, there were 37,500 ounces of gold coins sold, which is equal to 25 percent of all sales during January 2013. Gold sales from Australia climbed 41 percent last year with gold coins and minted bars climbing to 754,635 ounces in 2013, up from 533,000 ounces a year earlier. Turkey’s gold imports increased 64 percent in December to 31.6 tonnes. Russian lenders purchased 181.4 tonnes of Russian-produced gold in 2013, representing an 8.3 percent increase year-over-year and 90 percent of the country’s production.

The sale of silver coins in the U.S. rose to a record of 42.675 million ounces in 2013 from 33.743 million ounces in 2012. Australia’s silver coins sales surged by 33 percent in 2013. In Turkey, imports of silver rose to 41.6 metric tonnes last month, 36 percent more than in November. For the full year, Turkey imported 227.8 tonnes of silver, 60 percent more than in 2012.

Gold Market Weaknesses

The Macquarie Gold Team noted that cost-cutting will still be the focus for the gold producers in the recent fourth-quarter preview of earnings.  Macquarie also suggests that investors avoid companies that could see heightened survival risk at lower gold prices, such as Allied Nevada, Elgin Mining, and Lachlan Star.

Gold Market Opportunities

Shepherd and Cooke further note that the structural issues that led to the 12-year rise in gold prices remain firmly in place.  Unprecedented monetary policy in most of the world’s leading economies surely must impact the intrinsic value of fiat currencies leading to debasement and inflation, unless “the laws of gravity” are to be defied.  They strongly believe that gold may be close to a cycle bottom now.

We believe it is significant that in September of this year China will hold its first state-supported gold conference in Beijing. The China Gold Conference and Exposition is being organized by the China Gold Association with support from the World Gold Council, the Shanghai Gold Exchange, and the Shanghai Futures Exchange. This could be a timely opportunity and a nice venue for China to make new announcements about Chinese gold reserves and/or policy.  A substantial increase in China gold reserves could have a dramatic effect on the gold price.

Steven Shepherd and Allan Cooke of JP Morgan see substantial value in South Africa and they expect Harmony Gold to deliver handsome rewards for investors in 2014. The rand has been hit hard in 2013, and South African gold miners have a dollar revenue stream and largely rand-based costs, so despite the weak dollar price of gold, its value denominated in rand remains at a robust level for all but the most marginal mines. South African stocks are oversold and they appear to present a significant opportunity for buyers.

Gold Market Threats

Hedging of gold production has been back in the headlines, such as Barrick Gold’s board saying it would be discussed.  Some speculate that the motive behind the bullion banks’ push to require hedging more stridently in the future is due to COMEX warehouse stocks of physical gold running at very low levels.  Hence, the bullion banks, which may be short gold, need to replenish their supplies to return the leased gold to the central banks.  Perhaps this is why Germany is finding it so difficult to repatriate its gold stored in the U.S. and U.K. bank vaults.  Unfortunately for the miners, hedging gold at around $1,200 could mean producing at a loss.

Chile’s lower house members have submitted a draft bill aimed to make the use of desalinated water in mining processes mandatory, an effort to deal with the decreasing supply of water. The problem is that the cost of desalination in the country has escalated in recent years to the point that it is now twice as expensive as in the Unites States. This brought the mining industry’s energy operating costs in Chile as high as 14 percent of total production costs. The mining industry, which uses significant quantities of water, is one of the main pillars of the Chilean economy, with copper exports accounting for one-third of government revenue.

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