Posts Tagged price volatility
By Dave Brown — Exclusive to Gold Investing News
Gold prices have contracted over the past week under pressure from the drop in the euro, with European officials delaying a decision on the potential bailout package for Greece. With a level of lingering uncertainty, investors are reassessing their assumption that Greece will get the money, prompting speculative movements in gold, currency, and equity markets.
Spot market gold prices were down 1.9 percent over the last week, at $1,714.66 compared with $1,747.50 per troy ounce. the price has fallen in six out of the last seven trading sessions. Gold price remains up 10 percent on a year-to-date basis, but is not near last fall’s record $1,920.30, when pessimistic news from the Eurozone tended to provide a “risk on” trade benefit for gold prices.
This is of significance to gold investors, as a chaotic default in the country could intensify gold price volatility, supporting the price of gold with traders mitigating any currency exposure. Alternatively gold prices could fall further, as traders may look to a flight to quality and stability in dollar denominated assets.
Physical gold demand in India declines
Strong currency valuation for India has impacted the sale of gold bullion, as gold traders in the country have reduced consumption. this will be of interest to investors as India has traditionally been the world’s largest market for physical gold. Gold generally sees the highest sales volumes in India from October to December, particularly with the festival of Dhanteras in November; however, the Akshaya Tritiya festival in may has also demonstrated recent success.
Gold earnings season
John Ing, President and gold analyst at Maison Placements Canada, discussed his outlook for the majors in terms of the current reporting season, stating that “earnings should be good but not great. In the latest quarter the gold price was lower at $1,674 and as we saw in the third quarter, costs have been increasing.” Ing explained that “the creeping costs have probably pared about 5 percent in the latest quarter, according to our estimates. Basically, to mine an ounce of gold is just getting more and more expensive. Energy costs are undoubtedly a factor, but labor costs and of course there is increased taxation. Governments are trying to kill the golden goose, and they are imposing bigger taxes.”
The rising costs will have a larger impact on major producers, as the higher capital overhead and operating production pressures make it more difficult to manage costs and mitigate risks. Junior exploration companies will not be impacted as significantly, as they have not entered into the extraction or production phases, and will not be paying any royalty taxes.
Barrick Gold Corp. (TSX: ABX) reported earnings growth of 15 percent in the fourth quarter on higher gold prices and copper sales, but results missed analyst expectations as inflationary costs have impacted the company. Revenues increased to $3.79 billion from $3.01 billion for the previous quarter, while gold production totaled 1.81 million ounces with cash costs of $505 per troy ounce. the company failed to meet analysts’ predictions of $1.27 per share, posting results equal to $1.17 per share.
Goldcorp inc. (TSX:G) reported strong fourth quarter revenues of $1.5 billion, with adjusted earnings equivalent to 66 cents per share, exceeding the 60 cents expected by analysts. Gold production was reported at 687,900 troy ounces at a total cash cost of $261 per ounce. the company maintained full year guidance with a 4 percent forecasted increase in gold production to 2.6 million ounces. Total cash costs are expected to be below $275 per troy ounce of gold on a by-product basis, and range from $550 to $600 per troy ounce on a co-product basis.
Kinross Gold Corp. (TSX:K) reported its biggest quarterly loss to date, equivalent to $2.78 billion, due to a writedown on its Tasiast mine in Mauritania. the company announced a 33 percent increase in its dividend, from 6 cents to 8 cents per share. Kinross estimates its production costs in the current year will be in the range of $670 to $715 per troy ounce, up from an estimated $600 per troy ounce during the previous reporting period.
Junior company news
Golden Touch Resources Corp. (TSXV:GOT) reported locating nine new outcrops of gold mineralization within its Rubik Gold Project area. the company considers the location of these anomalous outcrops positive as it believes they indicate further gold anomalous shears that will occur, particularly to the east of the area drilled at its Gjazuj Prospect.
Timberline Resources Corp. (TSXV:TBR) reported a consolidated quarterly net income of $0.45 million for the period ended December 31, 2011. the company’s exploration expenditures of $1.06 million during the quarter were related primarily to the exploration drill program recently completed at its South Eureka Property in Nevada. the exploration program is expected to increase the company’s present NI 43-101 resource estimate at Lookout Mountain.
Goldgroup (TSX:GGA) announced an NI 43-101 compliant 314 percent increase of its indicated resource at the company’s Caballo Blanco gold project in Veracruz, Mexico. the project’s indicated resource at the La Paila Zone grew from 139,00 to 575,000 ounces of gold at a grading of 0.62 g/t. the project’s inferred mineral resources amount to 419,00 ounces of gold at a grading of 0.54 g/t. Goldgroup is currently on target to commence production on the Caballo Blanco project by end of 2012. Goldgroup’s President and CEO, Keith Piggott, commented that “the updated resource estimate on the Caballo Blanco project is a significant milestone for the Company. Goldgroup has been able to grow substantially the resources in the La Paila Zone, which is expected to form the basis of our upcoming PEA in the first quarter of 2012.”
Helio (TSXV:HRC) reported an NI 43-101 compliant update to its mineral resources estimate at its SMP gold project in Tanzania. the estimate is a 104 percent increase of both measured and indicated resources to 1,020,000 ounces at 1.32 g/t gold with a 0.5 g/t cut off.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.
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All global markets other than India, Japan and the U.S. experienced gains in investment demand; many of them (except Thailand and Saudi Arabia) saw double-digit increases.
While investment demand thrived during the third quarter, jewelry demand fell victim to the quarter's economic fragility and price volatility-falling 10 percent on a year-over-year basis. Only four markets-China, Hong Kong, Japan and Russia-saw jewelry demand increase.
The WGC says a shift toward high-growth economies is “undeniably conspicuous in the gold market.” nowhere in the world is this more evident than in China, where consumer thirst for gold appears unquenchable. China's total demand, around 612 tons year-to-date, has already eclipsed that of 2010. in addition to domestically consuming every speck of gold mined in China, it's estimated that the country's gold imports could reach 400 tons in 2011. That's roughly equal to the combined tonnage of gold demand for the Middle East, Turkey and Indonesia in 2010-and that's just imports.
Consumer demand for gold in China increased 13 percent (year-over-year) during the third quarter as the country continues to close the gap on India. Chinese jewelry demand, also up 13 percent, eclipsed India for only the fourth time since January 2003. Combined, the two Asian giants account for over 50 percent of global jewelry demand.
The WGC says, “China's increase in demand is being fueled by rising income levels, a by-product of China's rapid economic growth.” This growth has given birth to more than 100 million gold bugs in China's rural areas. China's smaller third- and fourth-tier cities were responsible for the bulk of the increase in jewelry demand, the WGC says. in addition, the Gold Accumulation Plan (GAP), a joint effort from the Industrial & Commercial Bank of China (ICBC) and the WGC which allows investors to purchase gold in small increments, reached 2 million accounts in September. the WGC says GAP sales have already exceeded 19 tons so far this year.
Things weren't quite as rosy for demand in the world's second-largest jewelry market. Indian jewelry demand took a 26 percent hit as volatility in the rupee shook investor confidence. the rupee decreased 9 percent against the U.S. dollar during the third quarter, more than double the currency's average quarterly move over the past five years.
Historically, Indian jewelry demand bottoms in July-August, before picking up heading into the Shradh period of the Hindu calendar. that didn't happen this year because Indian consumers were discouraged by high and volatile prices. the WGC says:
”Consumer confidence in India has been knocked by the persistence of high domestic inflation rates. Inflation of almost 10 percent, as measured by the Wholesale Price Index (WPI), adversely affected jewelry demand, through its impact on both disposable income levels and general consumer sentiment.”
Currency Effect on Gold Prices
The weaknesses of the rupee against the U.S. dollar also negatively affected India's demand. This chart illustrates the dramatic effect currency fluctuations can have on gold prices.
The gold price in Indian rupees has appreciated over 31 percent since June 30, more than three times the price appreciation denominated in Japanese yen. This means that a consumer looking to buy gold in Japan would have three times the purchasing power to buy gold at their local dealer than an Indian counterpart.
The gold price in yen terms has lagged due to the currency's strong appreciation against other global currencies. It's a similar story for the U.S. dollar and Chinese yuan (pegged to the U.S. dollar), which investors have favored since fleeing the euro.
Chaos in the currency markets amplified gold's volatility to roughly twice historical levels during the third quarter, the WGC says. our research also shows that gold's recent roller-coaster ride is an anomaly. we sorted through 10 years of data to capture all of the 10 percent (plus or minus) moves selected assets have had over a one-month period. the results show gold experiences plus/minus 10 percent moves 7 percent of the time; about the same as the S&P 500 Index. in comparison, crude oil sees moves of this magnitude 30 percent of the time.
Gold equities have been more volatile than gold bullion. the NYSE Arca Gold Bugs Index (HUI) experienced these swings 33 percent of the time. in a market with gold prices trending upward, this beta provides a potential boost for miners. However, this can also have a negative effect during volatile markets as investors overreact to downside swings.
“Gold demand faces headwinds in the near term because of the strength of the U.S. dollar,” Marcus Grubb, Managing Director of Investment for the WGC said on a conference call Thursday. “I still think the macro situation is very favorable to gold because we still don't have a lender of last resort in the eurozone.”
Speaking of the eurozone, Nigel Farage-leader of the United Kingdom's Independence Party-spoke some much-needed harsh words to the European Council this week. Farage is one of the U.K.'s most powerful conservative officials and is an unabashed Eurosceptic, meaning he does not ideologically believe in the idea of the European Union. I originally saw the video posted on Zero Hedge* but it has since gone viral.
Farage lambasted the group saying, “The Euro is a failure and who is actually responsible, who is in charge out of you lot? well of course the answer is none of you because none of you have been elected. none of you actually have any democratic legitimacy for the roles that you currently hold with this crisis.” “You should all be held accountable for what you've done,” Farage continued later. “You should all be fired.”
I think Farage echoes the sentiments of many, who are exhausted, enraged and exasperated by the technocrat circus in Europe. Europe's carousel of fiscal calamity will certainly keep spinning in the near term and will likely continue to be covered heavily by the media. This will continue to drive the fear Trade, while China and the Far East power the Love Trade by feasting on gold.
Now that's something all gold investors can be thankful for.
U.S. Global Investors, inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. the company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.
For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.
All opinions expressed and data provided are subject to change without notice. some of these opinions may not be appropriate to every investor. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. the following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of September 30, 2011: Industrial & Commercial Bank of China.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. the MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. the HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.
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Chengdu, up 27 yuan per gram.Beijing International Jewelry Exchange Center Gold Sales Assistant Lee told reporters, friendship bracelets the price of gold may rise to $2000 / oz. More international analyst thinks, the gold market price volatility, will lead to increased risk of. ” there will be some risk, links of london sale media coverage of the Beijing investors money buy 11 kg and 5 kg of gold bullion investment news. But the reporter visited much home gold stores per capita, their gold stocks and reserve is adequate, links of london sale charms the actual situation is not as serious as you think.
Gold investment risk in the increase, Chengdu variety of gold bullion investment stock. In the current round of gold investment fever, the price of gold in 2015 will reach 8000 U.S. dollars / ounce. The price of gold to break through the end of two thousand dollars an ounce possibility should not. this round of European debt crisis of some of the excessive speculation, from July 31st to August 15th for half a month, the international gold market” one day a price”. According to the reporter, with a rapid rise in prices, links of london jewellery gold prices from 385 yuan / kg rose to 410 yuan,Some analysts believe that, links of london capital flow is too large will in turn cause price increase. Hot market with not stable state of mind, Shanghai, by the end of this year, can meet the demand of investors.
Recent gold analysts predicted that, will bring a lot of capital flow, crash is unlikely.” Tan Weihuan said.
In 8 month, but at the present time, an increase of 25%; the last half month price rose 20 yuan per gram. Last week, links of london sweetie bracelet achieve 365 yuan / kg, the price of gold rose 20 yuan per gram. Beijing food gold data display, the gold market is unusually hot. According to media reports, the Shanghai gold bullion investment part variety stores out of stock, from the end of last year to now East Jin Yu ( 600086) the price per gram of gold bullion investment rose 70 yuan, up 25 yuan; thousands of gold from 388 yuan rose to 415 yuan