SWOT Gold Analysis: Recent Strong Performance in Gold

On a weekly basis, our investment team shares the most important events in 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 stock and bond investments.

Here are the biggest precious metals events of the week:

Strengths

• Gold rose to $51 per ounce for the week, breaking above its 200-day moving average for the first time since August 2012. Reports show that the Federal Reserve began 2014 with a sharp increase in M2 money supply. In addition, gold ETF holdings showed a net increase of 22,000 ounces so far this month, reversing the large redemptions from last year.
• Dundee Precious Metals reported fourth-quarter earnings, beating the consensus and featuring better-than-expected production results. The results beat estimates primarily due to a rebound in Chelopech mine grades, which has exceeded guidance for three consecutive years. Another factor was that most of the improvements to the Tsumeb smelter are realized, and will allow full capacity production in the first quarter. This may prove as an inflection point for Dundee as Chelopech continues to deliver, the Tsumeb overhand is largely removed, and financial liquidity remains healthy.
• Klondex Mines released drill results from its Fire Creek project which included 166 grams per tonne over 1.5 meters, and 47 grams per tonne over 2.5 meters. The results extended the Joyce and Vonnie veins to depth, and the Joyce vein to the north. In addition, a drill hole intersected a new structure approximately 1,000 feet from existing infrastructure, highlighting the prospect of the Fire Creek deposit. Klondex is expected to release the Fire Creek PEA in the first quarter of 2014. According to M Partners, thanks to the significant underground infrastructure in place and a milling solution secured, the economics are likely to be very robust.

Weaknesses

• Gold is likely to remain in its 2014 range as sentiment on the U.S. recovery is still very well anchored. According to UBS, gold is in a frustrated market as the metal needs the risk-on, developed market growth story to be challenged in order to rise. Additionally, despite the emerging market turmoil, along with a few weak macro data points in the U.S., it appears investors will not budge. The risk for gold is that the environment makes it neither a clear-cut buy nor a sell.
• Barrick Gold achieved slightly better fourth-quarter results, while the company’s 2014 guidance appears weaker. Barrick incorporated higher operating costs along with slightly higher capital expenditure. Reserves decreased by 26 percent, significantly higher than prior management indications, while reserve grades increased by a modest 4 percent, according to Dundee Capital Markets analyst Josh Wolfson. The silver lining however, is that the company has dissipated some of the headwinds, and has the opportunity to focus on extracting profitable ounces. This is a move that the sector expects will drive more generalist buying.
• Iamgold Corporation has reported a strike over redundancy pay packages at its joint venture mines, Sadiola and Yatela, in Mali. Iamgold said its joint venture (JV) partner at the two mines, AngloGold Ashanti, was managing the local operations and remained in dialogue with employees and representatives. Mali, Africa's third-largest gold producer, will see its production dip in 2014 as AngloGold Ashanti and Iamgold close down the Yatela mine.

Opportunities

• There is chatter that the Bank of China stockpiled 500 tonnes of gold during recent weakness. A Financial Times article highlights that gold imports and production in China outpace the retail and investment sales data, leading to a 500-tonne gap, which is speculated to have been absorbed by the central bank. In addition, the Gold Forward Offered Rates (GOFO rates) tightened this week across the board, as a shortage of gold bars in London reflected the record Chinese physical off take in January.
• Paradigm Capital thinks that the recent strong performance in gold should translate into a rotation into equities whose share prices have lagged, starting with those of better quality. Despite the strong showing of the sector year-to-date, share prices have recovered only a small percentage over the past three-year loses, thus leaving a large amount of upside to be captured. As a matter of fact, gold has recovered only about 15 percent of its three-year, high-low spread, and the vast majority of equities have recovered even less.
• The chatter on private equity approaching the gold sector materialized this week as QKR has agreed to buy AngloGold Ashanti’s Navachab gold mine in Namibia for $110 million, as outside money begins to flow into the sector. QKR is one of the more high profile private equity groups that have amassed about $1 billion in funding, specifically to buy undervalued and turnaround mining assets. 

Threats

• Earlier in the week RBC published a report that highlighted their analysis on the expected negative impact on reserves for most gold producers. The analysis suggested most senior gold producers would cut reserves as much as 8 percent as they updated their reserves with lower gold prices and factored in a sharp reduction in capital expenditures. As reserve updates were announced, it became evident that senior producers went beyond analysts’ expectations and cut reserves up to 37 percent. The flipside is that this exercise allowed miners to identify and concentrate on extracting more profitable ounces, which will more than outpace the value lost to the reserves that were cut.
• Credit Suisse argues that the recent rally in gold through $1,300 is rather “uninspiring,” and will likely be met by substantial selling from “stale longs of whom there are still many looking for an exit.” The bank’s analysts argue physical demand has been steady and the main driver of the strong upswing is short covering. Against that backdrop, and in the context of a 12 percent rally in U.S. 10-year rates, the gold rally is nothing to write home about.  As such, they maintain a bearish outlook on gold.
• ABN Amro, the largest Dutch bank by assets, argues that gold will decline as the U.S. dollar strengthens on positive macro data. The bank, which last spring announced  it would not honor its commitments on physical gold deposits but would instead issue paper gold receipts to its customers, says that the positive start gold has seen this year as the best-performing metal, will soon come to an end.

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The strengths, weaknesses, opportunities and threats of the gold market are published every week by U.S Global Investors. You can subscribe here. It arrives in your email inbox every Friday evening and best yet, it’s free.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 12/31/13: AngloGold Ashanti, Barrick Gold, Dundee Precious Metals Inc., IAMGOLD, Klondex Mines Ltd.