Will Gold’s Oversold Rebound Continue?

Strengths 

Gold Fields was the best-performing senior mining stock for the week, up 33.96 percent. CEO Nick Holland said investors are missing the quality of its foreign operations by focusing on delays and higher costs at its domestic projects. The company’s mines in Peru, Australia and Ghana helped raise headline earnings to $19 million in the second quarter, mending losses from the previous two quarters.

• Alamos Gold was the best-performing junior mining stock for the week, up 20.57 percent. The company recently reported positive second-quarter financial results and was upgraded by the Canadian Imperial Bank of Commerce (CIBC). We see the stock trading 5 percent above the fair value of its resource base.
• According to the latest SEC filings, Stanley Druckenmiller bought shares in a gold ETF worth $323.6 million at the end of June, making it the largest position in his family office fund.
• South African unions accepted the Chamber of Mines’ final gold pay offer, ending what has been a contentious rout of negotiations.

Weaknesses

• Eldorado Gold was the worst-performing senior mining stock for the week, down 12.67 percent. The company is battling to develop its Greek mines in the face of government opposition. Citing an “openly hostile” Greek Energy Ministry, the company said it would suspend most mining and development activities at its operations in northern Greece. It also said it would take legal action against the government’s decision to revoke its technical studies at the development projects.
• Rubicon Minerals Group was the worst-performing junior mining stock for the week, down 22.57 percent. The company’s update on its projects revealed some delays in the extraction of its first trial slope. This will likely cause a cash burn that could force the company to come back to the markets to raise money.
• In the past few months, a handful of mines have dropped under $1 per share, prompting notices from the New York Stock Exchange that they have six months to resume trading over $1 for at least a month or else they will be forced to delist. Companies affected have been McEwen Mining, Thompson Creek Metals and Silvercorp.
• Huaan Yifu Gold ETF, the bullion ETF with the biggest volume in China over the past month, posted a third straight weekly outflow. Outflows could be driving liquidity needs.

Opportunities

• According to Strategas, 30 percent of S&P 500 Index stocks have fallen to a 20-day low. Readings in excess of 50 percent would be more consistent with a washout. That means gold’s oversold rebound can continue. According to the King Report, if there is no stock market appreciation from the recent rout, the entire rationalization for financial repression will be destroyed. If a bear market for stocks develops during financial repression, the economic consequences should be dire. At that point, it would then be time to get long pitchforks and torches. Government leaders and Fed officials would be a short.

• China increased its gold reserves 1.1 percent in July as gold prices dropped 4 percent in July, according to data release from the central bank this week. This may suggest that China is selling some of its dollar reserves and rolling it into gold. If these monthly updates become a mainstay, it could provide momentum for the gold market.
• The release of the U.S. Consumer Confidence Index is expected to show an improvement from 90.9 to 93.4. Given the recently mixed economic data, a disappointment could lift gold prices.

Threats

• Barnabas Gan, the top-ranked precious metals forecaster, said the Fed will still raise interest rates this year, which will hurt gold.
• According to Citigroup, Venezuela appears poised for a near-term crisis amid protests and basic goods shortages as the country heads for parliamentary elections in December. As such, the central bank could be tempted to sell part of their gold reserves to raise funds.
• If next week’s release of second-quarter GDP comes in stronger than the expected 3.2 percent, it could raise the prospect of a September rate hike by the Federal Reserve and potentially depress the gold price.

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