Demand Surges On Low Third Quarter Gold Prices

Strengths

• Gold remained the strongest of the precious metals this past week, seemingly stuck in a narrow trading range for much of the week.  Silver did a little worse, falling 3.52 percent, perhaps related to Bank of America warning that silver could hit $12 per ounce on weak industrial and investment demand.
• Low gold prices in the third quarter attracted bargain hunters, with U.S. buyers buying up far more coins and bars than they did in any other quarter over the past five years.  Demand surged by 207 percent from a year ago.
• Central banks and other institutions boosted gold purchases to the second-highest level on record in the third quarter as countries including China and Russia sought to diversify their foreign-exchange reserves. Net purchases were 175 metric tons, nearing the record 179.5 tons in the same quarter a year earlier, and up from 127.9 tons in the preceding three-month period. Further, China probably boosted central bank gold holdings yet again in October, raising them by about 14 metric tons.

Weaknesses

• Palladium tumbled 13.24 percent and platinum followed with a loss of 8.27 percent for the week.  Total known holdings in palladium and platinum ETFs fell 9.38 percent and 6.78 percent, respectively, in October. The slide continues in November with palladium and platinum holding down another 6.27 percent and 6.00 percent, respectively.  Pent up demand for autos are thought to have peaked industrial demand in China has been slack.
• In the past several months, Venezuela has liquidated about 19 percent of its gold holdings as a result of the plunge in their oil related revenue, which accounts for 95 percent of the country’s exports, with upcoming bond payments fast approaching.
• Chow Tai Fook, the world’s largest jewelry retailer, issued a profit warning saying it expects net profit for the half year ended September to fall by 40-50 percent from a year ago. However, this might relate mostly to their operations earlier in the year as the World Gold Council reported that the gold market started the third quarter with a jolt. Further, they noted China’s historic devaluation of the yuan during the summer fueled a gold bar and coin buying spree in the country as investors sought to protect themselves from further market volatility. On a separate note, Canaccord Genuity reported that Alamos Gold’s third quarter results represented a miss relative to their forecasts and consensus on most metrics. Consolidated production was lower than their forecast and total cash costs were higher, which in turn resulted in lower than expected earnings and cash flow. Alamos Gold is also the worst performing North American gold miner this year, falling over 50 percent year to date. While this could prompt bargain hunting speculators, the effect of tax loss selling as the year closes out could dampen the stock further.

Opportunities

• A recent report by Paradigm Capital notes that gold’s recent meltdown will likely define the bottom of this cycle and sets the stage for a significant late 2015/early 2016 rally for the metal. This is important for the equities as historically they have anticipated the upturn. With that in mind, Klondex Mines reported very positive results for third quarter. They generated operating cash flow of $13.3 million, increased cash by $5.8 million, and eliminated its senior notes. Further, they raised annual production guidance for the second consecutive quarter.
• Integra Gold reported that its Triangle resource deposit estimate exceeded expectations. The company reported a revised indicated and inferred resource estimate based on an additional 27km of drilling. The indicated resource increased 14 percent while the inferred resource increased 344 percent. These results are very positive and validate the 15 percent stake taken in the company by Eldorado Gold earlier in the year. Separately, Gold Standard Ventures announced a substantially higher grade oxide gold zone north of its Dark Star Deposit in Nevada, including 157 meters of 1.51 grams per gold ton. The company said the new gold zone has an order of magnitude better grade and thickness than anything previously drilled at Dark Star. This is another junior explorer which has seen a senior miner take a significant stake in it, in this case by Oceanagold.
• Barrick reached an agreement to sell certain non-core Nevada assets for $720 million, above the higher end of market expectations. Barrick’s focus on balance sheet recapitalization has merit and shares could provide investors attractive beta as gold prices recover from recent lows.

Threats

• According to UBS, the recent gold monetization schemes launched in India have high chances of succeeding. While the rupee has depreciated by 47 percent against the U.S. dollar over the past five years, gold in rupee terms is up 28 percent. This could prompt locals to monetize their gold holdings.
• In India, a country where an estimated 800 million people depend on agriculture and many revere gold as ornament and store of wealth, farmers flush with cash during harvest season have historically been big buyers of bullion. Sales usually surge this month in the main festival season of Diwali. However, this year the El Nino weather pattern has led to the driest monsoon season in six years, reducing farm output and incomes. Demand is so weak among the rural Indians who make up almost 60 percent of domestic gold consumption that dealers who stocked up before Diwali are offering some of the biggest discounts in decades.
• Fed officials have recently been drawn from just two backgrounds – academics and alumni of Goldman Sachs. The announcement that Neel Kashkari will become president of the Federal Reserve Bank of Minneapolis marked the third Goldman Sachs alumnus in a row to be picked to become a Fed bank president. Of the 17 Fed officials in office next year, all but three will have professional backgrounds as academics or with Goldman Sachs. This poses a serious risk of groupthink within the Fed. The narrow range of backgrounds may lead to a central bank that is thin on expertise when it comes to the responsibilities that extend beyond monetary policy. 

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