Weekly Gold Market Review – May 29th

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 $1,190.55 down $15.65 per ounce (-1.30%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 1.34%. The U.S. Trade-Weighted Dollar Index gained 0.90% for the week.

Gold Market Strengths

Shanghai Gold Exchange withdrawal volume continues to be strong, coming in at 45.5 metric tonnes for the week ending May 15. According to Credit Suisse, the gold monetization plan in India may boost imports if banks pay investors interest on bullion deposits. The Austrian central bank announced it has adopted a new storage strategy whereby it will store 50 percent of its total gold reserves in Austria by 2020; it currently has only 17 percent within the country.

GDP shrank at a 0.7 percent annualized rate in the first quarter, lower than the previous 0.2 percent growth estimate. With the expansion stalled, the Federal Reserve may be inclined to hold interest rates at record lows longer to ensure sustained growth.

UBS has slapped a buy recommendation on its entire gold coverage list with the exception of Newcrest and Independence Group. Balmoral announced it intersected 216 g/t of gold over 0.76 meters in a new discovery zone at its Fenelon and Jeremie Properties in Quebec. Roxgold announced it has received approval of its Mining Convention for the Yaramoko Gold Project from Burkina Faso’s Council of Ministers.

Gold Market Weaknesses

Australia, an engine room of the decade-long global commodity boom, is forecasting a staggering 90 percent plunge in spending on projects, according to Mineweb. The fall in spending may portend more mergers in the future.

Gold faced a second weekly drop and investors cut holdings in bullion-backed funds to a four-month low amid speculation that U.S. interest rates will rise this year.

The Democratic Republic of Congo’s Mines Minister announced that Ivanhoe would have to seek approval of its sale of copper assets to Zijin Mining. The issue, if not resolved quickly, threatens to cloud what is otherwise a landmark deal as the company pushes forward in developing a trio of major deposits.

 

Gold Market Opportunities

China has announced the establishment of a new international gold fund with over 60 countries as members. The fund, which expects to raise 100 billion yuan ($16 billion), will develop gold mining projects across the economic region known as the New Silk Road. The project will facilitate the central banks of member states to acquire gold for their reserves more easily.

While the conventional wisdom holds that rising real rates would strengthen the dollar, which would in turn pressure gold, Cornerstone Macro believes otherwise. In a recent piece of research, it demonstrates how global growth determines the direction of the U.S. dollar, not the U.S. economy.  Only when the U.S. economy briefly decouples, does the dollar strengthen, but this is rarer now as global trade is 60 percent of world GDP and emerging market currencies have a 69-percent weighting in the Trade-Weighted U.S. Dollar Index.

Global-Growth-US-Dollar-May_2015

2015 has been a busy year for acquisitions as the value of gold deals jumped more than 150 percent in the first quarter compared to a year earlier. Producers are seizing on a wave of mine sales and tumbling asset valuations to expand output or secure growth projects. This week Barrick Gold announced that it signed a strategic partnership with Zijin Mining Group which will take a stake in its Porgera Joint Venture gold mine in Papua New Guinea. Under the deal, Zijin will acquire 50 percent for $298 million in cash.  It appears that Zijin received a very favorable price on this transaction as Barrick is hoping to bring in a partner on other South American assets which need a capital injection.  Additionally, Evolution Mining has agreed to pay $550 million for Barrick’s Cowal mine in Australia’s New South Wales which went for considerably more than where we see the relative valuation of this asset.

 

Gold Market Threats

Peter Major, mining specialist at Cadiz Corporate Solutions, announced that issues like government interference, the power and conflict between unions, and BEE legislation have all contributed to a situation where mine productivity in South Africa has declined significantly and speculated the gold industry could be wiped out by 2020 if the current direction persists.

South Africa gold mining groups face tough pay talks as they gear up for crucial wage negotiations in the coming weeks.

McKinsey & Company published a study showing that worldwide mining operations are as much as 28 percent less productive today than a decade ago. It attributes increases in capital expenditures and operating expenditures as having the greatest impact on productivity trends. Up-sizing projects by increasing the productive capacity of the project to shorten the mine life did not yield the higher IRR’s (Internal Rate of Return) forecasted by the models.

 

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