Every week, our investment team reviews a variety of sources to formulate a summary of the top events in the gold, resources, and emerging markets. The results are categorized in terms of strengths, weaknesses, opportunities and threats. We believe this SWOT model helps investors make informed decisions about their gold and gold stock investments.
For the week beginning March 10, here is the SWOT for the gold market.
- Gold posted a very strong week, rising $43.07 per ounce as Chinese macroeconomic data revived fears of a global slowdown, and geopolitical tensions brewed ahead of the scheduled Crimea referendum this weekend. Furthermore, and as shown on the chart above, the 50-day moving average closed less than $10 below the 200-day moving average, which implies that barring a gold collapse below $1,300 next week, we should see gold making a golden cross before the end of the week. Our analysis shows that, going back to 2000, a golden cross in gold is followed on average by a 50 percent rally lasting on average 15 months.
- Gold ETFs appear to be back in fashion, as total known gold ETF holdings are now 870 thousand ounces higher since bottoming at 55.8 million ounces in mid-February. The ETF data comes as the situation in Ukraine reinforces gold’s safe haven status and the weak macroeconomic data coming from China highlight gold’s hedging properties amid a risk-off investing environment.
- Pretium Resources Inc. (TSX: T.PVG, Stock Forum) announced the addition of James Currie to its executive team as chief operating officer. Currie has notable mine-building experience, and was recently chief operating officer for New Gold Inc. (TSX: T.NGD, Stock Forum) where he led the construction of the New Afton gold mine. On a different note, Aldridge Minerals Inc. (TSX: V.AGM, Stock Forum) received environmental approval for its Yenipazar Project in central Turkey. With the completion of this milestone, Aldridge is positioned to advance the project towards financing and construction.
Weaknesses
- The China Gold Association (CGA) said China’s gold demand may decline by 17 percent to 250 tonnes in the first quarter of 2014, from 300 tonnes in the first quarter of 2013. Despite this fact, CGA vice chairman Zhang Yongtao expects annual demand to remain strong at 1,176 tonnes, very close to the actual annual demand for 2013. According to HSBC Research, Mr. Zhang's forecast indicates that China's gold demand should be stronger for the rest of 2014 after the first quarter, when compared to the same period in 2013. This may indicate that China's strong appetite for gold is likely to be sustained well into 2014.
- As part of its fourth-quarter results release, Detour Gold Inc. (TSX: T.DGC, Stock Forum) stated it is permitted to enter into transactions to hedge up to 50 percent of its forecasted gold sales. As a result, Detour sold forward 40 thousand ounces at $1,241 and 45 thousand ounces at $1,327, for a total of 85 thousand ounces at $1,287. With gold closing above $1,380 per ounce today, it could be said that the hedging exercise will cost Detour shareholders nearly $80 million in forgone revenue this year.
- Hochschild Mining suspended its full-year dividend despite beating its production guidance. According to the company’s top management, 2013 proved to be a very challenging year, and despite the cost saving and cash flow optimization measures implemented, the company posted a net loss of $128.7 million after impairments, and decided to suspend its payout.
Opportunities
- A Royal Bank of Canada (TSX: T.RY, Stock Forum)report shows similarities between the 2005 to 2008 gold price rally and the current gold price environment, which analysts believe could lead to a sustained gold price rally over the next 12 to 24 months. While still early in gold recovering from its lows, Chinese and emerging market gold demand combined with the absence of central bank selling both offset any ETF liquidations. Given the volumes seen in China recently, and the fact the Chinese market is not as price sensitive – thanks to high savings rates – Chinese demand on its own could replicate the 2005-08 ETF-driven gold rally.
- Integra Gold Corp. (TSX: V.ICG, Stock Forum) reported the results of the preliminary economic assessment carried out at its flagship Lamaque Gold project in Val d’Or, Quebec, showing an expected after-tax internal rate of return of 38 percent on peak annual production of 143,000 ounces per year. The Lamaque project is one of a handful of high grade, low capex, and stable jurisdiction projects in development right now. On a similar note, Alacer Gold reported record annual gold production at its Copler gold mine, at all-in costs of $864 per ounce. The company expects this outstanding performance to continue into 2014, at one of the lowest all-in costs in the industry.
- An independent analysis has determined that Australia’s Mineral Resource Rent Tax (MRRT) has only managed to raise A$232 million this fiscal year, a far cry from the A$4 billion originally forecast. A spokeswoman for Australia’s Treasurer Joe Hockey stated the tax should be eliminated because it has destroyed jobs and investment. Australia’s Prime Minister Tony Abbott has pledged to repeal the tax.
Threats
- A recent report by several non-governmental organizations including the Sierra Club asserts NAFTA “provided the ingredients for an explosion of dangerous foreign mining activity in Mexico.” Dorothy Kosich, Americas’ Editor for Mineweb, reports contents of the original report stating Mexico has become the largest importer of multiple toxic chemicals which are major sources of water contamination. The report concludes that NAFTA has protected foreign mining corporations and allowed harmful environmental impacts to Mexico.
- A wave of weak economic data released by the Chinese government agencies this week helped propel gold higher as U.S. and Europe markets weighed the risk of a deceleration in Chinese economic growth. The weak data points released show the risk of Chinese physical gold and jewelry buyers to defer consumption to a later date. As a matter of fact, Chinese retail sales data showed growth of 11.8 percent, missing analysts’ estimates for a 13.5 percent increase. As a result, gold demand from China may be lower in the short term, or until the festive and marriage season starts later in the year.
- The instability in Ukraine, together with the China hard-landing fears, has not changed Goldman Sachs’ bearish view on gold. According to Jeffrey Currie, the bank’s head of commodities research, the weakness in the U.S. and the turmoil in Ukraine are not driving gold. Instead, the lower mining costs mean it is more probable that gold drops below $1,000. Marc Faber on the other hand believes the near tripling of the S&P 500 since the end of the bear market in 2009, together with heavy insider selling, high valuations, and extremely high corporate profits should make any investor consider the possibility that we may be at a top of the U.S. equity cycle.
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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results. The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 12/31/13: Alacer Gold Corp, Aldridge Minerals Inc., New Gold Inc., Pretium Resources Inc.