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3 major fundamental changes in the gold market

Big Al
February 12, 2016

The article posted below is from The Financial Post. While the overall article was dry there was one paragraph that stands out…

“Some of the gold fundamentals are clearly bullish. The World Gold Council reported on Thursday that overall gold demand grew four per cent in the fourth quarter of 2015, while central bank demand jumped 25 per cent. Mine production dropped for the first time since 2008.”

These are some major changes that needed to happen for a change in the gold market. If these trends continue, which they clearly seem to be doing this year we will see a sustainable run. These are long term factors that take time to build up steam – especially the supply (production) decreases – but they truly change the high level outlook for a sector.

Click here to visit the original posting page over at The Financial Post.

Gold is back in vogue with investors, but the question is, does this rally have legs?

Gold is back in vogue as investors seek out a safe haven amid growing global volatility.

The question is whether this gold rally will have legs, or whether it will fizzle out like numerous others over the past few years.

The yellow metal is in the midst of a tremendous upward move, jumping 18 per cent since the start of 2016. The key gold futures contract rose by a whopping US$53.20 an ounce on Thursday alone, bringing it to US$1,247.80. Gold’s performance this year is the polar opposite of most other commodities, which are down sharply.

Gold’s surge comes as global equities tumbled into a bear market. On Thursday, stock indexes worldwide fell on fears over the health of the global economy and banking sector, with MSCI’s world stock index dropping to more than 20 per cent below its peak, while safe-haven 10-year Treasury yields hit their lowest since 2012.

Several factors are working in gold’s favour: In addition to wobbling financial markets, central bank gold buying is on the rise and the U.S. dollar is weakening as investors are increasingly doubtful that the Federal Reserve will raise interest rates as much or as quickly as previously assumed. Those doubts gained steam after chairman Janet Yellen’s remarks to Congress this week, in which she took a cautious tone on the economy.

Over the past few years, the consensus view from Goldman Sachs and other Wall Street banks was that U.S. interest rate hikes were imminent and were poised to crush the gold price. That drove many generalist investors out of the market, and they are only starting to take an interest again.

“The expectation that gold was going to be completely beaten up on the back of Fed interest rates hikes looks like it’s not going to happen,” said Sean Boyd, chief executive of gold mining giant Agnico Eagle Mines Ltd. “People are saying that they need some protection and are revisiting gold.”

Boyd said that as the rate hike thesis became ingrained, traders massively shorted gold and overwhelmed any bullish signals in the market. That encouraged investors to dump their holdings. Now that the interest rate thesis is changing and investor sentiment has turned positive, he is hopeful that gold is poised for a sustained upturn.

Some of the gold fundamentals are clearly bullish. The World Gold Council reported on Thursday that overall gold demand grew four per cent in the fourth quarter of 2015, while central bank demand jumped 25 per cent. Mine production dropped for the first time since 2008.

Investors have been buying gold aggressively so far this year through exchange-traded funds, which added close to 100 tonnes of gold as of Feb. 4. ETFs shed a staggering 880 tonnes in 2013, which drove prices down.

The bullion rally has provided a huge boost to Canadian gold mining stocks, which were up across the board on Thursday. Kinross Gold Corp.’s shares rose 14 per cent, Barrick Gold Corp.’s shares rose four per cent, and B2Gold Corp.’s shares jumped 14.5 per cent.

Despite the recent gold euphoria, questions remain about the sustainability of this rally. Gold also moved higher in the first quarters of both 2014 and 2015, but could not keep that momentum for more than a few weeks. Many experts believe the same thing will happen this time around. Goldman Sachs, for one, remains skeptical — this week, it predicted prices would drop to US$1,000 an ounce by the end of 2016.

But Martin Murenbeeld, chief economist at Dundee Capital Markets and a close follower of the gold market, believes this rally is a bit different. He noted those prior two moves were tied to specific geopolitical events: Russia’s seizure of Crimea in 2014, and the Greek election in 2015.

“There’s no specific crisis today that one could say is pulling up gold, and as soon as it dissipates that gold will come back off,” he said.

“What looks to be happening is the U.S. dollar is rolling over. If the dollar rolls over, gold will do much better.”

Financial Post

pkoven@nationalpost.com

Twitter.com/peterkoven

Discussion
55 Comments
    Feb 12, 2016 12:19 AM

    I own gold..I own silver..The banks don’t keep it save for me..I keep it safe for me.
    Most of it paid for in cash, so the Govt doesn’t know I have it..I sleep well at night.

      Feb 12, 2016 12:32 AM

      We know now. Thank you for advising. You are in our files.

        Feb 12, 2016 12:22 PM

        Big Prat…..UP YOURS…………

    Feb 12, 2016 12:27 AM

    The Goldman trap again…………”it predicted prices would drop to US$1000″…..who in the world believes the banker’s banker.

      Feb 12, 2016 12:37 AM

      GS was probably the contract holder for the skew trade.

        Feb 12, 2016 12:22 AM

        The implication being, GS is not bigger than gold.

          Feb 12, 2016 12:49 AM

          Don’t tell Yellen, ….she is looking to Goldman for her golden parachute, once she jumps ship…..I wonder what her first book will be. Might be…”How I got Wallstreet and Mainstreet, to think I knew more than Uncle Ben” OR “ZIRP and ZIP Up, Your pockets ,because We’re going down”

      Feb 12, 2016 12:32 AM

      Like FT today Frank – ‘Gold at highest for twelve month – sell, sell, sell.’ Always do the opposite of the what FT and Wall St journal say!

        Feb 12, 2016 12:31 AM

        Wall St ….Journal……..that says it all……..the more you buy and sell, the more commission they make.

    Feb 12, 2016 12:34 AM

    Looks like gold miners rose on volatile gold prices. Gold volatility is as high as the decline, so this is a sign of reversal of the ‘Skew Trade’ and the end of a very protracted skew.

    http://schrts.co/PTm5d0

    Feb 12, 2016 12:09 AM

    Morris Hubbartt just happened to take a look at a monthly gold:Dow (rather than Dow:gold) chart like the one I posted yesterday. Those who are unable to view my monthly charts can watch his video to see what I was talking about:

    http://www.superforcesignals.com/video/2016feb11gold/2016feb11gold.html

      Feb 12, 2016 12:09 AM
        Feb 12, 2016 12:07 AM

        Great video from Morris as usual. Great chart from Matthew as usual.

        Business as usual….. : )

          Feb 12, 2016 12:22 AM

          Thanks as usual for being a nice guy as usual. 🙂

      Feb 12, 2016 12:12 AM

      And here’s a still shot of Hubbartt’s chart:

      http://www.321gold.com/editorials/sfs/hubbartt021216/gold_vs_dow.png

        Feb 12, 2016 12:40 AM

        Remind me to sell some gold and buy the DJIA when the ratio is 1 to 1.

          Feb 12, 2016 12:10 AM

          The ratio reached about 2 to 1 in the 1930s, 1.3 to 1 in 1980 and I believe it could about .85 to 1 this time but I would start carefully fading the trade well before that time comes, IF it comes.

      Feb 12, 2016 12:43 AM

      Matthew
      I tried a fork placement on the current gold daily. What do you think? A new channel pattern for gold?

      http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=2&mn=0&dy=0&id=p11884781116&a=445146929&listNum=1

        Feb 12, 2016 12:06 AM

        Yes, definitely a new channel. Here’s how I see it (I added the trigger line). The gray fork is based on weekly closes. On a closing basis, gold broke out when it went above 1199.

        http://schrts.co/TCQiDw

          Feb 12, 2016 12:10 AM

          Brian & Matthew – Nice forking work. Great charts.

            Feb 12, 2016 12:26 PM

            EX…Stop swearing…….

            Feb 13, 2016 13:46 AM

            IrishTony – just me replying using your name is cursing in Leprechaun dialect.

            What’s a lad a to do?

        Feb 12, 2016 12:55 AM

        Brian, AXU looks superb and is flying after last week’s breakout of a big Schiff fork:

        (I left my “tools” in place this time in case you’re interested.)

        http://schrts.co/hYaEk5

          Feb 12, 2016 12:02 AM

          Greatly appreciated, Matthew
          I’m just starting to play with the fork tools, so charts like this allow me to really dig deep to understand their utility and usefulness.

            Feb 12, 2016 12:11 AM

            Click again; I added another fork that happens to be resistance right now.

    Feb 12, 2016 12:40 AM

    We need the s&p to break 1850 for a strong rally further and we can make it if oil can push higher.

    Feb 12, 2016 12:12 AM

    We just got past 1850 with oil pushing higher than 29 and now we could have a strong rally starting finally.

    Feb 12, 2016 12:30 AM

    Now that the gold and silver market have shown signs of life we have the prophets of doom and restraint calling for a correction as if the prices of the metals have risen too far. Prices relative to the world economy, debt or money supply are next to nothing.
    Gold and silver prices are not even close to any kind of exchange rate between currency and money(gold,silver). Corrections are not justified until metal prices exceed the exchange rate between the world economy and real gold or silver bullion and or coin. Is the market healthy? Not at all! It is suffering from endless bullet wounds from never ending drive by shootings by those who want something for nothing.

    Feb 12, 2016 12:12 AM

    I nibbled at a position in Perseus today along with Nicola Mining (formerly Huldra Silver)

    Perseus Mining Limited Earns A$12.0 Million Profit for Half Year to December 31, 2015
    PERTH, WESTERN AUSTRALIA–(Marketwired – Feb. 12, 2016) -DJNF

    Perseus Mining Limited (“Perseus” or the “Company”) (TSX:PRU) (ASX:PRU) is pleased to announce a profit after tax (“PAT”) of A$12.0 million, or 2.3 cents per share, for the Half Year to December 31, 2015 (“HY2015”).

    Highlights of HY2015 results include:

    — 5% increase in revenue

    — FX gain of A$17.9M

    — Cash balance of A$94.6M, or 17.9cps – A$51.5M (119%) more than HY2014

    — Combined value of cash and bullion of A$99.1M, or 18.7cps at the end of

    HY2015 – up A$41.3M or 71% on HY2014

    — Hedge book of 120,267 ounces sold forward at an average price of

    US$1,276/oz with a value of A$35.3M

    — Working capital of A$164.9M – an increase of A$39.6M, or 32%, on HY2014

    — No third party debt.

      Feb 12, 2016 12:15 AM

      CFS – If you see this I’d love to get your financial mind to dissect these numbers on Perseus Mining.

      For me they are sitting pretty with NO DEBT, and working capital of $164.9 Million, as a small producer. I am not really sure why the share price isn’t about 2-3 times higher on this company. They look pretty solid to me, especially with Gold at these prices.

    CFS
    Feb 12, 2016 12:17 AM

    They are debt free! What BS……They are hedged.
    All that is needed to kill them is inflation of production costs.
    That is what almost killed Barrick.

      Feb 12, 2016 12:21 AM

      That is a good point. I should have said no 3rd party debt, but yes they are hedged.

      Yes, inflation in production cost from a currency move or higher prices in Oil may crimp their revenues some.

      Thanks CFS.

        Feb 12, 2016 12:25 AM

        Here is their most recent corporate presentation (from October) but it is dated in comparison with that press release today. It does have a bit more info on the hedging, the mine, the production, etc for reference.

        http://www.perseusmining.com/aurora/assets/user_content/PRU%20pres%20updated(1).pdf

          Feb 12, 2016 12:28 AM

          Darn that link doesn’t seem to be working. Hopefully this one will link to the page on their website with the corporate presentations:

          http://www.perseusmining.com.au/presentations.77.html

            Feb 12, 2016 12:32 AM

            From that October presentation on Perseus:

            Corporate
            At 30 September 2015, working capital of A$191M included:
            Available cash and bullion of A$132M (excluding $14M in escrow)
            Gold hedging of 149,100oz at weighted avg price of US$1,240/oz valued at approximately A$27M
            No third party debt other than ordinary accounts payable

        Feb 12, 2016 12:42 AM

        I agree with CFS. That hedge book could become more than a bummer very easily but I do not expect costs to rise as much as the gold price this time (as they did last decade) so that would limit the pain somewhat. Still, I hate hedging. I buy risky miners for leveraged exposure to the metal. Why venture into the riskiest and most volatile sector there is and then seek to find ways to eliminate risk and volatility (and upside)?

        I want pure plays and the best leverage I can get. Very high cash balances also limit your leverage. At a critical turn from bear to bull, I want good companies that are compromised in some way that will be alleviated by higher metal prices.

        In a mature bull market, quality can be much more appealing since the riskier stocks become too expensive and lose a lot of their leverage.

        At all times, I prefer any hedging to be done by me not my miners.

          Feb 12, 2016 12:45 AM

          Here’s some more info on their hedging process (it is only on 1/3 of their production)

          Perseus manages gold price risk using simple forward sales contracts
          •45,344ozs gold sold during Quarter at weighted average price of US$1,291/oz (June quarter: US$1,307/oz)
          •At 30 September 2015, 149,100 ozs gold hedged at an average price of US$1,240/oz
          •Hedging position represents approximately one third of forecast gold production on a 24-month horizon
          •Hedge book “in the money” to $26.5M

            Feb 12, 2016 12:47 AM

            In the lower price environment with Gold going sub-$1100 it was actually saving their butts over the last few years, but if the price of Gold does really take off, it will limit 1/3 of their production gains, but they have upside in the other 2/3 and the new mine they are building in Ghana.

            Feb 12, 2016 12:54 AM

            Thanks for the feedback on the criteria you are looking for when you select miners.

            I do prefer pure plays as well, and am not a huge fan of hedging either.

            With Perseus, it just seems like they have a lot of upside in the new mine they are developing. My thought about their high cash flow is that this is what is enabling them to pay for resettlement of housing, and can be used for exploration, development, and acquisitions without having to dillute shareholders. They do have royalty interests affecting the overall mix though as well.

            Maybe I’m just an idiot but I didn’t risk much capital and just nibbled at a small position.

            Feb 12, 2016 12:01 AM

            No, you’re not an idiot and, in this case, I don’t think you’re taking a big risk at all. BUT, how would you feel about the hedges if gold finished the year at 1550 and oil at 70 (adding to costs)? Aside from the hedge book, I thought Perseus looked decent the first time you told me about it.

            Feb 12, 2016 12:16 AM

            Thanks. Yes, on the 1/3 they hedge, that would absolutely be a big bummer, and Oil at 70 would have an impact on input costs(luckily I’m not expecting Oil at 70 any time soon).

            However, if gold stays in the mid 1200’s – mid $1300’s or even blast’s up to the $1400s then the unhedged production would enjoy those gains, and the 1/3 gold hedged at $1240 would take it on the chin, but not too badly. I get you point though if Gold just took off in 2017 into the mid $1500s. Couldn’t they move their hedge up at that point, depending on the nature and terms/time frame on their current hedging deal?

            I am interested to see if they get the green light for development on their mine in Ghana this quarter, and await the news any day now. In my mind this was kind of a play on that upside surprise on the 2nd mine being a go forward. Of course, being denied the mine would be a sucker punch though. They are paying to relocate people and building them new housing at present, so that tells me they are fairly sure they are going to get the nod from the government.

            Man, I got a bad case of buyers remorse now, but I appreciate the honest feedback.

            Feb 12, 2016 12:42 PM

            Well at least Perseus Mining moved up today on the news and press release. Here is the new press release pasted below. I only had segments released through the wire service earlier, but this is their full update:

            Perseus Mining Limited Earns A$12.0 Million Profit for Half Year to December 31, 2015
            PERTH, WESTERN AUSTRALIA–(Marketwired – Feb. 12, 2016)

            http://www.juniorminingnetwork.com/junior-miner-news/press-releases/508-tsx/pru/16474-perseus-mining-limited-earns-a-12-0-million-profit-for-half-year-to-december-31-2015.html#.Vr5C9Pk7tFo

    CFS
    Feb 12, 2016 12:03 AM

    Maybe I’m overly cautious. (and I’m not talking specifically about any company)
    It annoys me intensely, when I see miners not doing what is economically best.
    I know money has to be raised to run any company. It can be raised by selling shares. It can be raised by taking on debt. It can be raised by forward selling. (Hedging)
    Mining is ALWAYS tending towards a decreasing asset business .
    That is to say the company buys or leases land containing a limited amount of minable material. (That amount may vary with the cost of the commodity, but it is always limited)
    The majority of mining companies are (IMHO) run for the benefit of the management, not the stupid shareholders. This is especially true of the smaller companies.
    As an owner of the company, I want to be paid the cost of my investment.
    This can happen in the form of dividends which keep pace with inflation.
    this can be paid by efficient exploration which discovers more minable commodity and thus increases the value of the company. It can be paid by the company using its expertise and buying other smaller companies and creating a more efficient bigger company. There are lots of ways.
    What I don’t want to see is a company giving its management lots of options, thereby diluting me out of the picture. I don’t want to see high grading; digging out the best ore, because it is not profitable to mine the bulk of the ore.
    Unless there are specific reasons, I don’t want to see hedging; especially not at a price down 35% from a recent peak.
    Indeed, I would like to see a much reduced production when prices of the commodity are low, and increased production when commodity prices are high.
    Like I stated many mining company managements run the company for the manage. Always producing regardless of price, giving lots of option incentives. Stupidly giving excessive warrants when raising new capital (This invites broker shorting, which has in the past killed more companies than have survived)
    I know this sounds negative of small companies. where the biggest gains can be made, but where also most failures occur….it always depends on the quality of management.

      Feb 12, 2016 12:29 AM

      CFS – Incredibly well said !

      I do agree with you each point:

      – the challenges with the different methods miners use to raise money (selling shares, raising debt, forward selling, streaming deals, selling non-core assets).

      – the short-term thinking of high-grading the best part of a project at low asset prices for survival, but missing the huge upside of selling that high grade at higher prices

      – the problems with small or large companies over-paying management, and not thinking of the shareholders

      – the mistake of giving out too many warrants (invites short-selling a later date).

      – the added plus of dividends, exploration upside, and acquisitions

      *This is one of the things I respect about some of the decisions Endeavour mining has made lately. I also think a number of Uranium companies are only producing just enoughtto meet their sales contract is very wise in the low price environment.

      I like Mandalay Resources for paying the dividend.

      I like Avino Silver & Gold and Silvercorp for their high growth profile and great job lower costs.

      I like McEwen because Rob does like dilution, streaming, or hedging.

      There are a number of companies doing a great job, but most companies have different philosophies of how to borrow, pay down debt, pay management, invest in growth or development, invest in exploration, or invest in acquisitions. That all comes down to the decisions of the board and management competence.

      Good stuff!

        Feb 12, 2016 12:31 AM

        Correction to the McEwen Mining – Rob does NOT like dilution, streaming, or hedging.

        Feb 12, 2016 12:57 AM

        Speaking of ASM – I actually had a nice trade today in Avino Silver and Gold:

        Sold @ $1.0601, Bought back @ $0.9683, Currently ASM is back up to $1.0301

        Fun times!

          Feb 12, 2016 12:58 AM

          make that $1.05 in ASM now…….

          Wow! what a snapback rally. There is still life to this move up in miners.

            Feb 12, 2016 12:03 PM

            ASM closed at $1.08.

            That was a good day trade, and beat the pants out holding it all day.

    CFS
    Feb 12, 2016 12:08 AM

    oops manage should be management

    CFS
    Feb 12, 2016 12:09 AM

    oops manage should be management