- rates negative, as President Mario Draghi unveiled historic measures to fight deflation. By cutting the deposit rate to 0.1 percent, the central bank will effectively charge banks for holding money overnight. The bank also cut its main refinancing rate to 0.15 percent. Dennis Gartman, author of The Gartman Letter, said “the ECB’s policy changes were very expansionary and that on-balance is supportive of gold…I think more is coming.”
- The gold price declined on Friday morning after U.S. employment data was released, but recovered intraday, closing unchanged. U.S. employers added 217,000 jobs in May after a 282,000 gain in April. The median Bloomberg forecast called for a gain of 215,000 jobs in May.
- China and India (Chindia) are consuming more gold than the global production, according to Bloomberg’s Ken Hoffman. His research shows that China is consuming gold at a rate of 5.15 million ounces per month, while India, at the current import-tariff reduced rate, is consuming 2.85 million ounces per month. The total Chindia consumption is 8 million ounces per month, or 560,000 ounces higher than the estimated 7.44 million ounce per month global-mine output. With this deficit in mind, any relaxation of Indian import curbs will likely skew the fundamental supply-demand balance even further into deficit.
- The merger and acquisition (M&A) front got a new hit this week as B2Gold signed a merger-implementation agreement with Mali-focused Papillon Resources. The deal, valued at around $570 million, gives B2Gold one of the better assets in West Africa with 4.2 million ounces in the measured and indicated category, at 2.4 grams per tonne. In other news, Centerra Gold will begin shutting down its Kumtor mine in Kyrgyzstan unless the government grants necessary approvals to continue mining. Kumtor’s revenue represents about 5 percent of the whole Kyrgyz economy. It is positive that this company takes a stand against a government that continuously moves the goal posts for a critical industry.
Weaknesses
- The U.S. Mint’s gold coin sales slumped in May, reaching a total of 35,500 ounces, 7.9 percent lower than the preceding month. The report reinforces the expectations for weak seasonal demand as we head into the summer. On a positive note, the Mint reported silver coin sales rose 12 percent from April and 15 percent from a year earlier.
- PwC, in its latest Mine Report published Thursday, says “2013 was a year that forced the global mining industry to realign expectations in one of the most difficult operating environments for years.” Gold’s greatest decline in three decades, coupled with record impairments of $57 billion last year, saw global mining profits plunged 72 percent to a decade low of $20 billion in 2013. Gold miners lost $110 billion off market capitalization, while gold reserves fell 8 percent in 2013, to 431 million ounces.
- No settlement has been reached in the platinum-sector strike in South Africa, nearing its nineteenth week. The stoppage has cost producers an estimated $1.9 billion in revenue, as the strike becomes the longest and costliest strike in the African nation. As a result, the mining sector contribution to the economy declined the most in 47 years, resulting in the first contraction of GDP since 2009.
Opportunities
- While its commodities analysts bash gold, calling it a “slam-dunk” sell, Goldman Sachs is actually buying gold. The bank has agreed to swap dollars for gold with the government of Ecuador, a total 466,000 ounces (or $580 million), at an estimated price of $1,245 per ounce for a three-year term. Even though the Ecuadorian side denied that the transaction was a sale, it is highly unlikely the South American government will have the means to recover its gold in three years. This is especially possible since Ecuador’s use of the dollar as official currency means it can’t finance its deficits by printing money. Actions speak louder than words, and Goldman is buying gold.
- RBC Capital Markets initiated coverage of Klondex Mines with a $3.00 price target and a buy rating. According to analyst Sam Crittenden, Klondex is uniquely positioned to create value with two high-grade gold deposits in Nevada. Klondex owns the Midas Mill and has very modest capital requirements going forward. Crittenden argues that the shares are not pricing the outstanding 41 gram per tonne grade of the company’s reserves. It also seems that it is not pricing the strategic value of its properties and mill, or the motivated and experienced team.
- Sentry Investments wants Mexico-focused producer Timmins Gold to remake its board of directors, citing displeasure with the current management and board. Sentry, who owns about 17 percent of Timmins, proposed a slate of six directors to the eight-member board as it seeks to draw M&A attention to the miner. In other news, Detour Gold reported high-grade drill results from its regional exploration at Detour Lake, which outlines the potential for blending higher grade ore to its processing facility.
Threats
- Gold prices are set to decline below $1,000 per ounce by 2016, according to a recent report by Societe Generale. The French bank believes the Federal Reserve is likely to hike rates at a much faster pace than currently discounted by the market. As such, bullion prices will trade below $1,200 next year and below $1,000 in 2016. In addition to selling gold, the bank also recommends selling silver due to high physical ETF holdings, as well as copper due to the Chinese slowdown.
- The Philippines government expects to double its annual returns from mining under a new revenue-sharing scheme approved this week. The scheme aims to retain as much as 55 percent of the industry’s net revenues, or 10 percent of gross revenue, whichever is higher. In a similar move, the Tanzanian government, Africa’s fourth-largest gold producer, is reviewing mining contracts to ensure the government earns a larger share of revenues.
- Newmont Mining has stopped output at its Batu Hijau mine in Indonesia, stating that its concentrate storage facilities are now full following the raw minerals export ban introduced by the Asian nation earlier in the year. The company will continue to sell copper concentrate from storage to PT Smelting, Indonesia’s only copper smelter. However, the smelter does not have enough capacity to buy all of Batu Hijau’s production.
Energy and Natural Resources Market
Strengths
- The end of Mexico’s 75-year state energy monopoly is creating opportunities for investors. Alfa SAB, a conglomerate with a stake in U.S. shale, increased its stake in Pacific Rubiales Corp, the Bogota-based company, to 12.3 percent from a previously disclosed 10 percent. That makes it the second-largest shareholder in Latin America’s biggest non-state-owned oil company.
- Goodrich Petroleum successfully completed the highly anticipated C.H. Lewis well in Amite County, Mississippi, and achieved a peak 24-hour average production rate of 1,450 barrels of oil equivalent per day. The company is expected to report results at the Nunnery well in the same county this month.
- In U.S. natural gas, the prompt contract rose by about 16 cents or 3.5 percent from the prior week, as the near-term weather forecast turned warmer than normal. Conversely, the weekly storage numbers continue to imply a narrowing deficit compared with last year.
Weaknesses
- Governor Francisco Perez, of Argentina’s Mendoza Province, seized half of YPF S.A.’s Chachahuen exploration field, Clarin newspaper reports, citing Mendoza daily Los Andes. YPF shared the field with Vila Manzano group. Mendoza may offer the area to another company in auction.
- U.S. hot rolled coil (HRC) steel prices fall for a third straight week. The CRU Weekly Price assessment shows US HRC at $677 per short ton, down $6 per ton from last week, on a rise in supply from increased production and imports. This follows a fall of $2 per ton last week.
- Copper fell 2.4 percent this week as China began an investigation into the use of copper collateral for multiple loans, prompting fears of inventory release into the market.
Opportunities
- Meeting the world’s energy supply needs by 2035 will require $40 trillion of investment, as demand grows and production and processing facilities have to be replaced, the International Energy Agency said. More than half of that amount will be needed to compensate for declining output at mature oil and gas fields, and the remainder for finding new supplies to meet rising demand, the Paris-based agency said in a report this week.
- BHP Billiton Ltd., the world’s largest mining company, flagged more investment in energy and fertilizer, while scaling down spending on steelmaking raw materials as China’s economy switches gears toward consumption rather than fixed asset investment.
- China is working on how to cap its greenhouse gas emissions for the first time, an effort that would spur a worldwide effort to hold back climate change. The world’s biggest producer of fossil fuel emissions has been studying for more than a year how and when it might be able to make its pollution levels peak and hopes to act as soon as possible, said Xie Zhenhua, China’s lead envoy to the United Nations global warming talks. “China will behave in a very responsible way for Chinese people and the world and we will try our utmost to peak as early as possible,” Xie said yesterday in an interview at the talks in Bonn with Bloomberg and other news organizations. “We are working very hard and trying to find a balanced equilibrium between environmental protection and economic development.”
Threats
- China’s Qingdao port halted shipments of aluminum and copper due to an investigation by authorities, causing concern among bankers and trade houses financing the metals, with approximately 80,000 tons of aluminum ($150 million current market value) and 20,000 tons of copper (about $140 million) claimed to be missing from warehouses. The port of Qingdao is China’s third-largest foreign trade port and the world’s seventh-largest port.
Emerging Markets
Strengths
- China’s official manufacturing Purchasing Manager’s Index (PMI) came out slightly higher than expected at 50.8 in May from 50.4 in April, thanks to improving new orders and production with moderating deflationary pricing pressure on upstream industrial goods. Selective government policy easing measures recently may have contributed to the sequential stabilization.
- India’s benchmark stock-index rose the most in three weeks, led by industrials and banks, after the PMI reached a three-month high of 51.4 in May. A Ministry of Commerce and Industry report released the same day showed April monthly data for key industries was surprisingly high as coal production rose 3.3 percent, steel production rose 3.1 percent and power generation rose a staggering 11.2 percent.
- Hungary’s April industrial-output growth unexpectedly accelerated at the fastest pace in three years to 10.1 percent, thus surpassing the median estimate of 7 percent growth. The largest growth driver is carmakers’ production boost to the fastest pace in eight years.
Weaknesses
- People’s views of Russia have strongly deteriorated since last year among people across all continents, according to a BBC poll. Negative views of Russia now average 45 percent across the countries polled, having gone up four points since 2013. In Russia, locals have turned more hostile towards the West than at any time since the breakdown of the Soviet Union, according to a recent independent poll. The change is arguably a result of a pro-Russian campaign to influence public opinion. The Kremlin’s state ideology is determined to self-isolate Russia from the Western world, effectively ending any hope for the country’s modernization.
- The HSBC Poland manufacturing PMI for Poland fell to 50.8 points in May, an 11-month low, from 52.0 in April, but still in expansionary territory. Polish exports orders declined after Russia imposed a ban on Polish pork and milk processing plants imports which
