Gold Investors Weekly Review – March 7th

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 $1,340.42, up $13.98 per ounce (1.05%). The NYSE Arca Gold Miners Index climbed 1.40% on the week. This was the gold investors review of past week.

Gold Market Strengths

The analysts at CIBC World Markets compared the current rally with the rally in 2009, both of which were preceded by a 29% drop from the highs during those times. Equities have outperformed bullion by roughly 14 percent during this 2014 rally, still shy of the 32% outperformance during the 2009 rally. In addition, the outperformance in the juniors and intermediates over the first months of 2014 could continue for the remainder of the year if we were to take a page from history. This was the case in 2009 as well, as shown on the following chart.


A Manhattan federal court filed a class action lawsuit claiming that five banks that oversee the century-old London gold-fix benchmark colluded to manipulate it. Authorities around the world are already investigating the manipulation of the gold market benchmark for signs of wrongdoing.

Gold Market Weaknesses

The Perth Mint, Australia’s largest, announced that its February gold coin and bar sales reached 47,003 ounces, compared to 64,818 ounces in January. In addition, prices at the Shanghai Gold Exchange have been at parity, or at a mild discount to international prices, over the past few days as a result of a somewhat expected seasonal liquidity withdrawal by the People’s Bank of China (PBOC) as the high demand from Chinese New Year came to an end.

In commenting on the current strikes and unrest in the country, South Africa’s Minister of Mineral Resources, Susan Shabangu, did not display a great deal of optimism. The Minister said we are definitely looking at a rationalization to a much smaller sector, where labor intensity declines over time. In her view, the problem is on how to get traditional mining companies to restructure into highly mechanized operations that can remain profitable in a new gold price environment.

Gold Market Opportunities

Gold jewelers in India are planning a nationwide shutdown to demand easing of curbs on precious metals imports. Jewelers want the import tax cut to 2 percent from 10 percent, and a relaxation of re-export requirements. The pressure on the government is mounting, especially following the recent release of the third fiscal quarter trade numbers, showing the nation’s current account deficit narrowed to the lowest in at least four years.

Palladium has soared to an eleven-month high on worries that economic sanctions against Russia could disrupt exports of the metal from the world‘s largest producer, and exacerbate an already tight supply situation.

Paradigm Capital published a report on the supply demand equation for gold this year, citing four significant factors that bode well for gold prices going into 2014. The ETF unwinding is practically unlikely to repeat, China became the largest consumer of gold in 2013 (and this year is off to an even better start), central banks are net buyers, and lastly, hedging is a drag for a higher gold price (for now remaining muted). According to Paradigm’s analysts, the magnitude of global demand for gold is in the 4,000- to 4,400-tonne range. This bodes incredibly well for gold, especially at a time when the biggest gold producers say global output will fall short of expectations.

Gold Market Threats

The Obama administration’s $4 trillion budget for fiscal year 2015 targets, among other things, the elimination of wasteful spending, providing a “fair return” to taxpayers from mineral development. This “fair return” includes charging a royalty on hardrock minerals such as gold, silver and copper, as well as a quest to levy an abandoned mine’s lands fee.

ABN AMRO, the largest Dutch bank by assets, reports that China’s gold demand is likely to be lower in 2014 as investor sentiment improves, and confidence in the Chinese policymakers’ ability to manage the economic transition is bolstered. Similarly, UBS says the rapid rise in speculative long gold trades raises the potential for a short-term “wash-out” as geopolitical risks come off recent highs.

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