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Weekly Gold Market Review

May 23, 2015

In his weekly market review, Frank Holmes of the summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,206.20 down $17.86 per ounce (-1.46%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 4.21%. The U.S. Trade-Weighted Dollar Index gained 3.09% for the week.

Gold Market Strengths

D.E. Shaw’s latest 13F disclosure shows that one of its top new buys by market value for the first quarter was SPDR Gold Shares which received the highest allocation with nearly a quarter billion dollar purchase.

Harriet Hunnable, executive director of precious metals markets at CME group, speaking recently in London said that the Shanghai Gold Exchange is the most successful challenger so far in terms of liquidity in the gold market versus trading houses in the West. She added that the CME Hong Kong kilobar gold contract is doing phenomenally well for such a new product. As the physical trading in London has come to crawl due to fear of regulatory oversight this is a positive move as it increases transparency hopefully becomes the benchmark for gold price setting.

Klondex Mines released drilling results at Fire Creek showing intercepts of 13.5 opt (461.6 g/t) over 11.5 ft (3.5 meters) on the Hui Wu Vein. These results provided further data that the initial grades reported are likely understating the grades and the additional infill results are pointing to overall higher grades.  Dundee Capital Markets noted the new data increased their estimate to 3.45 opt versus 0.45 opt, for the area in question, thus increased their target NAV by 22 percent for Klondex Mines’ share price.  By the end of the week, Klondex’s share price moved up by 8 percent.

Gold Market Weaknesses

Gold traders are divided on the price outlook for gold in the coming week with five bullish, six bearish, and two neutral.

Gold took a plunge earlier in the week prior to the release of the Federal Reserve minutes. However, it rebounded after the minutes signaled officials are unlikely to raise interest rates at their next meeting

Northern Star Resources managing director Bill Beament said that after an attractive few years for acquisitions, the pendulum has swung too far and the market for gold assets up for sale has reached elevated levels. Thus, he deems it better to drill for gold than the price being offered on the corporate side to buy an asset.

Gold Market Opportunities

Cornerstone Macro came out with a piece in response to the pushback against its bearish comments on the U.S. dollar. The firm defends its thesis stating the dollar is about to do what it always does in the wake of global stimulus, to move lower as the world’s economies gain traction and their currencies recover. The study was not based on conjecture, as it showed over the last 35 years stronger global GDP coincided with weakness in the U.S. Trade Weighted Dollar Index.

Oskar Lewnowski, co-founder of Red Kite, is planning to launch a new base and precious metals fund. Two years after striking out on his own to create private equity investment firm Orion Resource Partners, Lewnowski has already deployed almost $1 billion in equity, loans and royalty streams into at least 17 junior mining firms, and hired a physical metals trader to handle supply. This new fund will likely provide opportunity to fund the underserved junior mining space where there are good projects ready to taken to next level but the funding window has largely been closed.  This could be a headwind to traditional royalty companies as new competition continues to enter this lucrative market.

Bank of America points out U.S. equity funds have suffered $100 billion of outflows in 2015 while the S&P 500 has held steady, currently flirting with all-time highs. The bank says the upcoming summer months offer a lose-lose proposition for risk assets: Either the macro improves and the Fed gets to hike, or it doesn’t and EPS downgrades drag risk-assets lower. Thus, BoA advocates higher than normal cash levels and adding gold to portfolios. Further, summer starts the transition to seasonally stronger gold prices that go into the fall.

Gold Market Threats

China is said to require tax audits for all gold traders this year. An annual list of businesses to face mandatory audits in 2015 includes gold traders, exporters taking advantage of tax rebates and companies involved in mergers, stake sales and other equity transactions.

Bron Suchecki, the Perth Mint’s manager of analysis and strategy, came out with his thoughts on the “war on cash” and its possible impact on gold. With negative rates and various governments around the world restricting consumer’s use of cash, he said people will turn to gold instead of holding bank deposits. However, if this is the case, he poses that governments will move from restrictions on cash to restrictions on gold.

Zero Hedge noted the Economist published an editorial on gold earlier in the month essentially saying the metal was dead and buried.  There was nothing new in the article, repeating many of the hollow arguments why one should not own gold because it has not performed over the last two years.  Interestingly, the writer of the article noted that the Economist’s “cover stories” have often served as a contrary indicator whenever it comments on market, so perhaps this is a potential opportunity to consider.


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