2011 Halftime SWOT: Gold Market

By Frank Holmes

Gold Market

For the week ending July 15, spot gold closed at $1,593.55 per ounce, up $49.40 per ounce, or 3.2 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 4.40 percent. The U.S. Trade-Weighted Dollar Index was essentially unchanged for the week.

Strengths

• Gold prices hit a record high on Friday, July 15 after hints of further policy easing from the Federal Reserve and a Moody's warning that the United States may lose its top-notch credit rating. This news hurt the dollar and sparked buying of assets seen as safe havens.
• A significant headline missing from most news feeds was the fact that gold hit a new record high.
• Peru's Minister of Energy and Mines Pedro Sanchez said mining investment in the country has tripled during the presidency of Alan Garcia, who will leave office this month, reaching $13.78 billion between 2006 and 2011. Sanchez also said the mining sector now represents 8 percent of Peru's GDP, 72 percent of total exports and 50 percent of the income tax. Unfortunately, that was the past president and not the new one who wants a super tax on mining profits. Perhaps rational minds will prevail.

Weaknesses

• A congressional subcommittee hearing on cleanup of abandoned mined land sites on public lands was dominated by testimony from anti-mining interests. Opinions were expressed that the full cost of the problem was not known and financial assurances were needed so as to prevent any future hardrock mine cleanup from falling upon taxpayers.
• It was further highlighted that the Obama administration wants new fees leveled on mining projects not only on public land but also private lands, with the proceeds diverted to the Bureau of Land Management.
• South Africa's gold output fell 5.8 percent in volume terms in May compared with the same month a year earlier.

Opportunities

• The United States Mint has taken the demand for more mass production silver bullion coins seriously of late. It is expanding its offering to a planned total of 57 new coins by 2021 with the introduction of the America the Beautiful Bullion Coin Series. Canada's Royal Canadian Mint has followed suit expanding its offering of mass production silver bullion coins to eight by 2013 with the launch of its Canadian Wildlife Silver Bullion Coin Series Program. This should drive more retail investment into silver products.
• The U.K.’s first ever gold-dispensing ATM was launched in London’s Westfield shopping center. It follows the opening of gold vending machines in Las Vegas and Abu Dhabi, which received the world’s first gold ATM machine last year. The company behind the gold bar vending machines plans to install 50 machines across Britain over the next few years.
• As Chinese home sales fall, property developers are getting into mining in a big way, producing gold, lead, zinc and molybdenum. According to the China Mining Association, at least 15 major property developers have shifted investments into the mining industry, with a total investment of about $3 billion as of the end of June. Most of the investment is going into mines producing gold.

Threats

• With gold hitting new highs, several companies came to the market to raise over $400 million this week. A wave of new equity offerings could be a headwind to price gains for those stocks.
• Microchip, a major supplier of microcontrollers and semiconductors to the broader economy and a company noted for telegraphing changes in business conditions earlier than most companies, pre-announced lower-than-expected results for the second quarter and guided down revenues for the full year. The company noted the downturn it was experiencing was not regional or sector-driven, but global in nature.
• The unwillingness of government leaders to come to grips with economic reality was highlighted this week when the leader of the European Commission gave his solution to the eurozone sovereign credit crisis: “Just ban credit ratings on troubled sovereigns who are receiving financial aid.”

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