Weekly Review For Gold Investors – April 10th

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 $1,208.35 up $5.75 per ounce (0.48%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 2.2%. The U.S. Trade-Weighted Dollar Index gained 1.95% for the week.

Gold Market Strengths

Gold rose for the first time in four days on Friday after holdings in exchange-traded products (ETPs) backed by bullion saw the largest increase in more than six weeks. Silver rose the most in a week.

March gold imports for India came in at about 125 tons versus 60 tons a year ago. Furthermore, year-to-date (YTD) imports are at about 900 tons versus 662 tons the previous year.

Gold Market Weaknesses

Federal Reserve policy minutes released this week from their most recent meeting showed officials were split last month over whether they would raise interest rates in June. Short sellers used this as an opportunity to push gold down for a third day.

Norilsk sees South African output of platinum declining in the next several years. With output already falling, however, it is troubling that there has not been a positive price response.

Armed robbers walked away with an estimated $8.5 million of gold from the refinery at McEwen Mining’s El Gallo 1 Mine in Mexico’s Sinaloa state on Tuesday. The gold was contained in an estimated 900 kilograms of gold-bearing concentrate. The company announced that while it is insured, the policy won’t be enough to cover the entire expected loss. Apparently the furnace to produce the doré bars was offline for repairs, thus causing the gold concentrate to build up. This hints at the robbery being an inside job, with someone with knowledge of the buildup likely tipping off an outsider.

 

Gold Market Opportunities

Goldman Sachs published a report warning that capex cuts could threaten future production. In response to the multiyear commodity price correction, gold miners globally have cut capex by 52 percent since year-end 2012, which Goldman forecasts will drive a 7-percent decline in production by 2018 from today’s levels.

In a new report, RBC Capital Markets analysts identify three phases gold miners have historically gone through in response to low commodity prices: rationalization, restructuring and refinancing. Their view is that we are still in the rationalization phase, when management teams think prices will recover in the near term. Given this outlook, they respond to market conditions with “temporary fixes” such as cuts to sustaining capital. However, as we move into the restructuring phase, there is an uptick in insolvencies and mergers, and in the refinancing phase, optimism ticks up and well-financed companies try to consolidate mining camps. The RBC analysts believe these latter phases are coming soon.

Bank of America/Merrill Lynch published a report in which they argue that while producers have been focused on maximizing free cash flow from operations, there is a concern that not enough attention is being paid to the declining reserves trend. The average reserve life index for the North American gold producers has plunged 23 percent from 13 years ago at year-end 2012 to 10.2 years at year-end 2014.

Company-Reserves-and-Reserve-Prices-1985_2015

This relates to a study from Scotiabank, illustrated in the chart above, that argues the decline in reserves in 2014 came about mainly because companies did not replace depletion as the gold price used for reserve analysis was flat.

Head-Grade-vs-Reserve-Grade-GOLD-1990_2015

Furthermore, looking at the grade that has been processed (head grade) versus reserve grade, companies are currently processing close to reserve grade. Over the last five years, the average head grade is within 2 percent of reserve grade. Head grade in general has been seeing a decline in values since 2001 but dropped abruptly in 2005, forcing companies to struggle to keep their operations profitable.

 

Gold Market Threats

India is the world’s biggest consumer of gold, and its ancient temples have collected billions of dollars in jewelry, bars and coins over the centuries which are hidden securely in vaults. Now the government plans to get its hands on this temple of gold, estimated at about 3,000 tons, to help tackle India’s chronic trade imbalance. Prime Minister Narendra Modi’s government is planning to launch a scheme in May that would encourage temples to deposit their gold with banks in return for interest payments. The government would melt the gold and loan it to jewelers to meet an insatiable appetite for gold and reduce economically crippling gold imports. Key to Modi’s plan will be the interest rates offered for gold deposits. If India can cut imports, that would pressure gold prices that fell to a four-month low last month before recovering.

In Greece, hundreds of supporters and opponents of Eldorado Gold’s mining operation clashed despite police efforts to separate them. Police said more than 2,000 supporters and 850 opponents were involved. The mine operation has sharply divided residents, with some fearing environmental damage and a drop in tourism. Others welcome the nearly 2,000 jobs it provides at a time of economic crisis.

 

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