By Frank Holmes

Strengths

• India imported 102 tonnes of gold between November 1 and November 15, just 48 tonnes shy of its total imports for the entire month of October. This data reveals a robust physical demand for gold in the country. Furthermore, India is looking to remove its 80/20 rule this week in order to free up gold flows into the country while eliminating distortions in the flows.
• Central banks have been under pressure in Europe to account for gold held abroad. The latest news comes from France, where Governor of the Bank of France M. Christian Noyer has been asked to comprehensively audit the nation’s gold reserves. Likewise, the Netherlands repatriated some of its gold in order to restore confidence in the central bank. The increase in proprietary holding of gold by central banks is positive for global gold demand.
• The Swiss will vote on the “Save Our Swiss Gold” referendum on November 30. While the central bank has opposed the measure, which would require the bank to hold at least 20 percent of its reserves in gold domestically, considerable support exists. The central bank argues against the referendum on the grounds that gold is a volatile asset. However, equities and bonds are as well, especially in recent years. When the country’s currency was backed by a minimum of 40 percent gold, the central bank was still able to function properly, not like the hedge fund model that so many central banks employ today. If passed, the referendum should boost gold demand.

Weaknesses

• Four companies, along with Goldman Sachs Group Inc. and HSBC Holdings PLC, are being sued over claims that they conspired for eight years to manipulate precious metals prices. The lawsuits join the club of numerous other attacks on financial companies.

• Around 500 protesters blocking a main highway in South Africa were fired upon with rubber bullets by the police this week. The protesters claimed to be demonstrating about the granting of mining rights to billionaire Robert Friedland’s Ivanhoe Mines.
• Chow Tai Fook Jewellery Group Ltd., a major jewelry retailer in Hong Kong, reported a decline in profit of 23 percent for the six months ending September. Sales of gold products accounted for a significant part of the decline, falling 41 percent.

Opportunities

·         The chart above shows the profit margin of Klondex Mines Ltd. versus a peer group of other gold miners. On the vertical scale plotted against the valuation, enterprise value, is assigned by the market for a given revenue base.  In the case of Klondex Mines, its revenue of $33 million for the third quarter was slightly less than Argonaut Gold and Alamos Gold with $37 million and $39 million, respectively, however Klondex’s value is $175 million while Argonaut and Alamos sport enterprise values of $505 million and $638 million, respectively.  Strikingly, however, is that Klondex is the only company to post significant profit margins in a tough gold environment.  Klondex is set to end the year with roughly C$50 million in cash, up from C$7.6 million from the first quarter 2014. Klondex should be a considerable outperformer moving into and throughout 2015.

·         Duketon Mining Ltd., an Australian nickel and gold mining company, saw its market price jump 207 percent after it announced the discovery of a 5.8 meter intersection of massive sulphides in a recently pulled drill core.

·         Lucapa Diamond Company’s stock jumped this week after signing a 35-year diamond mining license agreement in Angola. The term of the license is the longest offered by the government’s new mining code. The agreement also allows Lucapa to recover all of its alluvial exploration and development expenditure from free cash flow and repatriate dividends and capital gains.

Threats

•  SocGen is forecasting an average gold price of $1,100 per ounce in the first quarter of 2015. The bank believes robust growth in the United States will lead the Federal Reserve to raise rates faster than anticipated, leading to a continuation of the downtrend in gold.
• Net bullish-dollar positions have reached a record of $48 billion as investors see an extension of the sharp rally in the dollar. A further rise in the dollar would be bearish for gold. However, the last time there was a net-long position to this extent was in 2009, which was shortly followed by a 17-percent decline in the dollar.

• Credit spreads between corporate and government bonds have been on the rise, indicating investors are demanding a higher premium for parting with their money. The rise in spreads comes as a warning sign that liquidity, one of the largest drivers of the stock market rally in recent years, could be deteriorating.  Jack Ablin, with BMO Private Bank, noted that further deterioration would move their big market liquidity indicator into bearish territory, leaving only two of their five indicators (the economy and momentum) in bull mode.

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 -- Published: Monday, 1 December 2014 | E-Mail  | Print  | Source: GoldSeek.com

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