Gold Firm on Stock Weakness and Bargain Hunting

Gold Firm on Stock Weakness and Bargain Hunting

Commentary for Thursday, Sept 25, 2014 (www.golddealer.com) – Gold closed up $2.60 at $1221.10 in what appears to be affirming in pricing which carried over into the aftermarket. This is unusual because the dollar is strong – the Dollar Index at 85.16 and the talk of expected higher interest rates continues. It is also interesting because in early trading gold pushed as low as $1206.00 before bargain hunting showed up and our number of phone calls indicated the public was again interested.

At this point in the consolidation of gold the physical market activity is dependent on public perception. The market is cheap by any standard but if the public believes we are heading lower they will remain on the sidelines. The change in that attitude – meaning how fast they go from “ho-hum” to “let’s buy” may indicate how close we are to a bottom. In other words the investor knows fundamentally that gold or silver is cheap but they want to see if the market might just go a little lower – and when it does not they place the order.

Silver closed down $0.26 at $17.38 and physical sales – especially Monster Boxes are obviously moving higher – but that usual “buzz” which has been missing lately seems to be returning.

Platinum closed down $5.00 at $1314.00 and palladium was off $17.00 at $802.00. The Platinum Group Metals have been weak of late but fundamentals still look good and supply is short. Why?

Platinum has been affected by the slower European economy. They use lots of diesel engines which depend on platinum in their catalytic convertors. Palladium recently hit $900.00 but has come off its highs – the result of a downturn in Ukraine tension, but supplies are still limited and no new production is coming online.  

The DOW was up big yesterday but this morning on CNBC there was red all over the place. When gold is pressured to the downside – and stocks are at all-time highs most commentators make the connection that this reinforces the downward pressure on gold prices.

True enough even though this latest weakness in gold prices is caused mostly by the strong dollar – but what is the opposite scenario in stocks? I think there is a ton of money sitting on the sidelines ready for the physical market when gold sentiment turns and there is another ton which will be looking for opportunity if stocks begin a bearish run.

Stocks – like gold can turn on a dime and the stock market has no long term memory. Everyone has forgotten the sad days when few dared suggest buying stocks. Everyone wanted complete liquidity – the DOW was under 10,000 and falling – and the safe haven aspects of gold sounded pretty good. Watch for a crack in the stock market and when it happens if only a small portion of that spec money moves into gold bullion you will see a price jump of $100.00.   

The World Gold Council publishes Gold Investor, Volume 7 – The growth dividend: how rising GDP lifts gold consumer demand – Investors understand that in times of economic duress high-quality, liquid assets such as gold are in high demand. What is less understood is that the majority of gold demand is linked to consumption and long-term savings – not for speculative purposes. As an economy expands, incomes grow and gold demand increases counterbalancing short-term investment flows. In turn, this pro-cyclical nature of consumer demand and counter-cyclical nature of investment demand make gold an effective diversifier and valuable portfolio component.

Always worth reading the World Gold Council (www.gold.org) talks about such things as Gold Demand Trends – Supply and Demand – News and Events. Most of the information is free and these folks are gold advocates which can be trusted.

This article by Nicole Mordant (Reuters) should be interesting if you are considering a bottom for the price of gold – Gold price seen near tipping point for mine cuts, closures – (Reuters) – The price of gold, down more than a third in three years, is approaching the tipping point where the mining industry would see a spike in the number of producers reducing output or even shutting down operations.

Several mines globally have already suspended output in the past 18 months, but not as many as industry watchers expected as producers focused on slashing costs and reworking mine plans to extract more profitable, higher-grade ounces.

But with bullion’s slide this week to a nine-month low of $1,208.36 an ounce, those defenses may not be enough.

"$1,200 is a critical level. The industry has geared itself around $1,200," said Joseph Foster, portfolio manager at institutional investor Van Eck Global. "If it falls below that level, then there are a lot of mines around the world that are really going to struggle."

Van Eck is a major investor in Barrick Gold Corp and Goldcorp Inc and a top shareholder in most other large gold producers.

Production cutbacks and mine closures would spell more financial pain for producers and investors, who have watched gold mining stocks slump 67 percent since September 2011.

And cuts and closures could be swifter and deeper than in the last gold bear market as most miners this time around have not offset the risk of potential losses by hedging – the practice of selling gold forward at a fixed price.

At the end of June, only a tiny fraction of production – around 129 tonnes – was hedged compared with the last bear gold market in the 1990s when hedging peaked at around 3,000 tonnes. The practice fell out of favor when hedged producers were unable to capitalize on rising gold prices between 2000 and 2012.

"TERRIBLE, HORRIBLE PRICE" – In response to weaker bullion, gold miners are estimated to have slashed their all-in cost of producing an ounce of gold to an estimated $1,350 in the first half of 2014, according to data from Thomson Reuters’ GFMS metals research team. That was down from $1,696 an ounce for full-year 2013.

Even so, Citibank estimated last month that 40 percent of the gold industry was burning cash at an all-in cost of $1,331 an ounce. But that was at a gold price of $1,290 an ounce. Bullion was last trading at $1,217 an ounce on Wednesday.

"How many guys are going to get up and say this is a terrible, horrible price and we can’t survive at this price? Because we can’t," Doug Pollitt of Pollitt & Co, a Toronto-based brokerage firm, said at the annual Denver Gold Forum last week.

Industry participants were loath to single out specific operations that could cut or shut down production but high-cost mines are at greater risk.

For example, Iamgold Corp and AngloGold Ashanti Ltd’s Yatela mine in Mali had all-in sustaining costs (AISC) of $1,910 an ounce in the quarter to end-June. The operation halted active mining in 2013 due to high costs and weak gold prices but continues to process stockpiled ore.

"This year, as the gold price continues to remain below $1,300 per ounce, we are considering bringing an end to the movement of ore onto the stockpiles and to just continue to leach the ore already on the pad until 2016," Iamgold spokesman Bob Tait said in an email.

Other high-cost producers include St Barbara Ltd’s Simberi gold mine in Papua New Guinea, which reported AISC of A$2,300 ($2,039) an ounce in the June quarter. An engineering program is underway at Simberi to improve plant performance.

Iamgold’s Rosebel mine in Suriname had AISC of $1,216 an ounce in the three months to end-June.

SUPPORT FOR GOLD PRICES – To be sure, some in an industry known for its optimism see a proverbial silver lining: they believe that a sharp drop in production will help to lift prices.

While gold is also a financial asset that can benefit from uncertainty and inflation fears, some investors and executives say less supply cannot help but put a floor under bullion.

Miners will remain loathe to invest in new projects at gold prices below $1,500, said Douglas Groh, a portfolio manager at Tocqueville Asset Management.

"Two years from now end-2016, 2017 and even into 2018, the markets will recognize that there isn’t new capacity coming on stream … Certainly the gold price will jump," Groh said.

For Goldcorp CEO Chuck Jeannes, the industry is close to "peak gold," an expression that means production is at its all-time high as deposits get harder to find as existing production gets mined out. "I don’t think that we will ever mine as much gold as we do in 2015. That’s positive for the gold price," he said in an interview.

The walk-in cash trade was active all day and the phones were also busy.   

The GoldDealer.com Unscientific Activity Scale is a “5” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 3) (last Friday – 4) (Monday – 4) (Tuesday – 5) (Wednesday – 5). The scale (1 through 10) is a reliable way to understand our volume numbers.

The Activity Scale is weighted and is not necessarily real time – meaning we could be very busy and see a low number – or be very slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view – perhaps a week or two. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers may indicate that volume is moving lower.   

Email confirmation using a PDF File when buying or selling is functional. It also includes the various forms of payment and includes bank wire instructions. And you can now see your actual invoice or purchase order on your computer screen.

When you buy or sell please check to see if we have your current email on file and that your computer will accept our email (no spam).

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Our four flat screens downstairs with live independent pricing (BullionDesk.com) are a big hit with the cash trade. Live pricing moves all the buy/sell product prices on a real time basis. Yes – you can visit the store with cash and walk away with your product. Or you can bring product to the store and walk away with cash. When buying from us remember if you exceed $10,000 in cash (the real green kind) a Federal Form is necessary.

In addition to our freshly ground organic coffee offered visitors throughout the day we have added cold bottled water, cokes and Snapple. We have also added fresh fruit in a transparent attempt to disguise our regular junk food habits.

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Thanks for reading from your friends at GoldDealer.com and enjoy your evening.

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