Every week, our investment team reviews a variety of sources to formulate a summary of the top events in the gold, resources, and emerging markets. The results are categorized in terms of strengths, weaknesses, opportunities and threats. We believe this SWOT model helps investors make informed decisions about their gold and gold stock investments.

For the week beginning March 3, here is the SWOT for the gold market.

Strengths

• The analysts at CIBC World Markets published an interesting note comparing the current 2014 rally with the rally in 2009, both of which were preceded by a 29-percent drop from the highs during those times. Equities have outperformed bullion by roughly 14 percent during this 2014 rally, still shy of the 32 percent outperformance during the 2009 rally. In addition, the outperformance in the juniors and intermediates over the first months of 2014 could continue for the remainder of the year if we were to take a page from history. This was indeed exactly the case in 2009.

• A series of debt deals were launched this week in the gold sector as the fixed-income market reopens for junior Canadian mining companies on the back of a recovery in the gold price and improved investor confidence. In one of the announced transactions, Imperial Metals Corp. plans to sell $325 million of high-yield bonds, and C$200 million of loans to fund the development of its highly prospective Red Chris copper and gold deposit in British Columbia.
• A Manhattan federal court filed a class action lawsuit claiming that five banks that oversee the century-old London gold-fix benchmark colluded to manipulate it. Authorities around the world are already investigating the manipulation of the gold market benchmark for signs of wrongdoing. Canadian hedge fund billionaire Eric Sprott cites the investigations into gold price manipulation as one of the triggers for a gold re-rating to $2,400 per ounce in a twelve-month span.

Weaknesses

• The Perth Mint, Australia’s largest, announced that its February gold coin and bar sales reached 47,003 ounces, compared to 64,818 ounces in January. In addition, prices at the Shanghai Gold Exchange have been at parity, or at a mild discount to international prices, over the past few days as a result of a somewhat expected seasonal liquidity withdrawal by the People’s Bank of China (PBOC) as the high demand from Chinese New Year came to an end.
• Barrick Gold could face higher fines or even a revocation of the environmental license for its controversial Pascua Lama project, after a higher court annulled a record fine imposed to the company by the Chilean environmental agency. The judges ruled that each of the detected breaches must be dealt with independently, which leaves the company exposed to a significantly greater fine than the original of $16.4 million.
• In commenting on the current strikes and unrest in the country, South Africa’s Minister of Mineral Resources, Susan Shabangu, did not display a great deal of optimism. The Minister said we are definitely looking at a rationalization to a much smaller sector, where labor intensity declines over time. In her view, the problem is on how to get traditional mining companies to restructure into highly mechanized operations that can remain profitable in a new gold price environment.

Opportunities

• Palladium has soared to an eleven-month high on worries that economic sanctions against Russia could disrupt exports of the metal from the world‘s largest producer, and exacerbate an already tight supply situation. According to Kitco, the worries come when the market was already dealing with reduced supplies as a result of a nearly six-week-old strike in South Africa’s platinum-group-metals mining sector. South Africa is the world’s second-largest producer of palladium.
• Paradigm Capital published a report on the supply demand equation for gold this year, citing four significant factors that bode well for gold prices going into 2014. The ETF unwinding is practically unlikely to repeat, China became the largest consumer of gold in 2013 (and this year is off to an even better start), central banks are net buyers, and lastly, hedging is a drag for a higher gold price (for now remaining muted). According to Paradigm’s analysts, the magnitude of global demand for gold is in the 4,000- to 4,400-tonne range. This bodes incredibly well for gold, especially at a time when the biggest gold producers say global output will fall short of expectations.
• Gold jewelers in India are planning a nationwide shutdown to demand easing of curbs on precious metals imports. Jewelers want the import tax cut to 2 percent from 10 percent, and a relaxation of re-export requirements. The pressure on the government is mounting, especially following the recent release of the third fiscal quarter trade numbers, showing the nation’s current account deficit narrowed to the lowest in at least four years.

Threats

• ABN AMRO, the largest Dutch bank by assets, reports that China’s gold demand is likely to be lower in 2014 as investor sentiment improves, and confidence in the Chinese policymakers’ ability to manage the economic transition is bolstered. Similarly, UBS says the rapid rise in speculative long gold trades raises the potential for a short-term “wash-out” as geopolitical risks come off recent highs.
• The Obama administration’s $4 trillion budget for fiscal year 2015 targets, among other things, the elimination of wasteful spending, providing a “fair return” to taxpayers from mineral development. This “fair return” includes charging a royalty on hardrock minerals such as gold, silver and copper, as well as a quest to levy an abandoned mine’s lands fee.
• CEO of Sibanye Gold Limited, Neal Froneman, was quoted saying that South African miners will resist government proposals for black empowerment ownership to be kept above 26 percent, even in cases where empowerment groups sell their stakes. The South African Department of Mineral Resources will publish a proposal later this year to force black empowerment ownerships to remain above 26 percent, even as companies argue that previous deals have diluted shareholders.

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors