Gold: A Great Buying Opportunity Approaches

Gold has officially entered a bear market, declining more than 20% from the September 2011 peak of US$1,924/oz. I warned in December last year and in March this year that gold was likely to fall further, even though I was optimistic on the long-term outlook. The reasoning was that gold had gone up every year for 12 straight years, a feat achieved by few assets, and that a sharper correction seemed inevitable at some point. After all, most bull markets have several corrections of +30% and gold had only experienced one steep fall of 29% in 2008. Also, the March-July period is traditionally weakest for gold prices as seasonal demand slows.

Now that gold is falling, what should you do? Well, the technical picture suggests that gold will move to US$1,300-1,400/oz. At these levels, gold would have fallen 27-32% from its peak. Remember that during the 1970s bull market, gold fell 47%, before rising 8x to peak in 1980. So no-one can rule out gold declining a lot more. But there are still good reasons to believe that the gold bull market is far from over. If you think that’s right, accumulating gold below US$1,400/oz makes sense.

But we’re getting ahead of ourselves. Let’s go through Friday’s events and what to expect from here.

What triggered gold’s steep fall on Friday?

Gold was smashed on Friday, down 4.7%. It wasn’t alone as silver finished down 5.3% and other commodities were also sharply lower.

Gold’s fall was largely technical. It breached May 2011 lows of US$1,536/oz. This triggered stop losses. Then the psychological US$1,500/oz was breached and further selling kicked in.

Silver hasn’t yet broken through its key technical support level of US$26/oz. But it should do soon enough.

Beyond technicals, are there other reasons for the sharp fall in gold?

Some have pointed to the European Central bank forcing Cyprus to sell its gold. This is nonsense though given Cyprus’ gold holdings were tiny.

The fact is that gold’s price action has been a concern for the past six months. Despite QE4 and Japan‘s monstrous stimulus package, gold has shown few signs of moving higher. Prior to this, stimulus had always stimulated the gold price too.

So what gives? Well, I think supply and demand for gold may offer a more plausible explanation for the recent price weakness. In 2012, gold demand fell 4%, the first decline since 2009. This was driven by a 12% decline in demand from India, the world’s largest consumer of gold. A rising rupee, making gold more expensive, as well as higher import tariffs, took a toll on Indian demand.

The decrease in gold demand was all the more remarkable given that central bank gold buying reached 48-year highs.

With India imposing higher tariffs on gold this year, there are good reasons to believe that Indian demand will continue to remain soft. Also, retail demand for gold exchange-traded funds has clearly been in sharp decline of late. Lastly, seasonal demand for gold is weakest in the second quarter of the year. It only ramps up in the second half in the lead-up to India’s festival of lights, Diwali.

The decline in gold demand has come while gold supply remains muted. While gold demand is likely to pick up in the second half of the year, supply should stay relatively flat. This is because it takes at least five years to get a gold mine up-and-running, and the 2008 financial crisis delayed a lot of investment into new mines.

Long-term, the supply picture looks poor as gold companies are cutting back investment spend, after it got out of control in the lead-up to 2008. More than a quarter of CEOs at the world’s top 25 gold companies have been replaced over the past 18 months as boards demand better returns on capital.

Therefore, though the near-term outlook is challenging, the picture beyond 2013 appears brighter.

How much further could gold fall?

The truth is that no-one knows. You can monitor supply and demand, the technical and so on, but putting a bottom on the price is impossible.

The 1970s can offer insights, though history never repeats. The gold price from 1974-1976 corrected 47% before it rose 8x to peak at US$887/oz in 1980. Extraordinarily, the price increased 4x in the 13 months before the peak.

All bull markets have sharp corrections. You should expect them and that way there’s not much to panic about when they do happen.

Does gold’s fall signal anything about the broader economic environment?

The different markets are sending mixed signals. Strengthening in bonds and the commodities sell-off would seem to indicate investor caution, or so-called risk off. But stocks are still at or near record highs in most markets, which indicates risk-on.

What’s clear is that economic data have deteriorated of late. In the U.S., poor retail sales numbers were the latest in a line of data which were below expectations. In Asia, export figures from countries dependent on global trade such as South Korea, Taiwan and Singapore have been abysmal.

My take on this is that stocks are the odd man out due to printed money flowing through to them. What I’m seeing is that deflation appears to be defeating central banks’ best efforts to produce inflation to reduce their debt loads. The prices of gold and copper (Dr Copper is used as a sign of economic strength or weakness) indicate that inflation isn’t on the horizon.

Whether these commodity price decline indicate a larger deflationary event is on the way is an open question. Let’s wait and see.

Is the gold bull market over?

Ah, the key question. I think there is a strong likelihood that the bull market isn’t over. History is my guide on this. Commodity bull markets have averaged 18 years over the past century, with 14 years as a minimum. We’re into year 13 of this gold bull market. If the bull market is over, it would be the shortest one in recent history.

More importantly, all bull markets have a so-called parabolic stage, where prices go up in a straight line. You see that in the gold chart of the 1970s. Same for the Nasdaq in the 1990s and so on. We just haven’t seen such a spike in this gold bull market.

Moreover, bull markets require significant public participation. I certainly don’t see the average person in most countries having participated in the gold bull market. It certainly isn’t reflected in the fund allocations of fund managers either. In the U.S. for instance, gold represents less than 1% of institutional fund portfolios.

Finally, history suggests that global currency devaluations favour precious metals. And as mentioned in my newsletter last week, the current expansion of central bank balance sheets is unprecedented.

What about gold stocks, which have been obliterated of late?

Gold stocks are at more than 10-year lows versus the gold price, as measured by the HUI index in the U.S.. They have been significantly underperforming gold for some time.

One key reason is that gold companies have seen mine cost blowouts, investment overspend and silly merger and acquisitions prior to this year. Shareholders did not get the benefits of higher gold prices through better company earnings and dividends.

As mentioned above, the cowboy culture of many gold companies is now changing. Boards are holding managements to account. CEOs are being more disciplined about investment spend, focusing on returns rather than getting bigger just for the sake of it.

In the end, gold stocks are leveraged plays on gold prices. But you need to be able to pick the right companies.

This post was originally published at Asia Confidential:http://asiaconf.com

Gold to be a lousy investment in the next decade

The Indian price of gold has risen six folds in the last decade, fueling a record speculative import spree. Soaring gold imports have hit $42 billion in the first ten months of 2012-13 , pushing the current account deficit to near-disaster levels. The finance minister is wringing his hands in distress, while housewives say that buying gold was the best thing they ever did.

Sorry, but the party is over. The notion that gold is the finest investment, whose value can only go up, is dead wrong. History shows that gold fluctuates crazily, so it can look a fabulous investment for some time and then become a total disaster. There's nothing safe about it.

The Indian price reached a peak of Rs 33,000 per 10gm in late 2011. It has since fallen steadily to just Rs 29,000. Global trends suggest we have entered an era of falling or stagnant gold prices. Housewives and all other buyers beware: gold will probably be a lousy investment in the next decade.

After the US went off the gold standard in 1971, gold shot up from $35/ounce to $835 in 1980. It looked the best investment in sight. But then its price crashed and stayed down till 2001, at around just $250/ounce. Gold investors lost their shirts (and sometimes underpants) for two decades.

However, after 2003 gold zoomed again. It reached a new peak of $1,890 in late 2011. But it has fallen steeply to just $1,501 last Friday. It may bounce back temporarily , but will then fall again.

The fall in price has been less dramatic in India because the rupee has depreciated against the dollar. Even so, gold in rupee terms is down 10% from its peak. Goldman Sachs estimates that the world price will fall sharply to $1,270 by the end of 2014, and other analysts are almost as gloomy.

--> Gold is a safe haven to which people rush in troubled times, so speculators hoped its price would rise in today's troubled conditions. North Korea is threatening nuclear war and Japan seeks to double its money supply. Cyprus has set a dangerous precedent by confiscating uninsured large deposits in its top banks, and this could have prompted a rush into gold. Why, then, has gold fallen instead of rising?

First, fears of a Eurozone breakdown took gold to a peak in 2011, but those fears are mostly gone, so gold is less needed as a safe haven. Second, the US is finally set, after five years, to end its quantitative easing of money supply, reducing the monetary fuel of speculators.

Third, as part of its bail-out package, Cyprus may have to sell its gold reserves to raise 400 million euros. Not only will this glut the market, it stokes fears that similar gold sales may be forced on other troubled Eurozone countries that may also go bust. Troubled Italy has the fourth largest gold holdings in the world of 2,452 tonnes, worth a whopping $95 billion.

Speculators had poured $26 billion into gold-linked securities in 2010 and 2011. But after mid-2012 , when fears of the Eurozone's survival ended, many speculators (including George Soros, the most famous of all) decided that the gold boom was over and got out of the market. Money fled from gold-linked securities. SPDR Gold Shares, the biggest exchange traded fund linked to gold, has seen net redemptions of $7.7 billion in 2013 so far.

Indian speculators and housewives, please read the writing on the wall. The special reasons driving the gold boom of the last decade have gone. It's time to sell gold, not buy.

To discourage gold imports, the finance ministry has increased the import duty on gold. Unfortunately this has raised the domestic price correspondingly, rewarding instead of penalizing speculators. It has also led to increased smuggling.

In decrying and trying to suppress gold imports, the finance ministry has unwittingly given the impression that gold is a great bet. Moreover, government banks today are aggressively pushing sales of gold coins to customers as a must-have investment. They should be obliged to warn customers of the risks too.

The finance minister should warn people, in speech after speech, that gold has already fallen a lot and is likely to fall much further. Every time the gold price falls, he should come out with advertisements saying "I told you so".

Last but not least, he should announce that the import duty on gold will be abolished by the end of the financial year. This will induce people to stop importing now, and wait for next year, by which time speculation may be ebbing anyway. The balance of payments will improve magically.

Why gold and silver are in the dumps

By Nigam Arora

Over the last month, if one could simply watch the news but not know the price of gold and silver, the logical conclusion would have been that this is the glory time for precious metals. After all, from every direction, news was coming that should have driven precious metals higher.

The Bank of Japan got a new chief who started running printing presses faster than Bernanke. Cyprus came close to confiscation of bank deposits, by taxing the deposits. Central banks bought $3 billion worth of gold in the first two months of 2013. North Korea threatened to fire nuclear missiles at U.S. targets.

Based on all of this news, gold should have gone to new highs, but instead gold and silver are in the dumps.

There are outflows from the popular SPDR Gold Trust GLD -3.55%  and iShares Silver Trust SLV -4.33%  . Gold and silver miners have been hard hit. Several components of popular miner ETFs Market Vectors ETF Trust Market Vectors Gold Miners GDX -4.59%   and Market Vectors Junior Gold Miners ETF GDXJ -6.39%   have been hovering near recent lows.

To understand what is happening, take a look at the long-term weekly chart and the medium-term daily chart of GLD.

Click here for the long-term weekly for chart.

Click here for the medium-term daily chart.

The long-term chart shows that about a year after I gave a signal to aggressively buy gold in the $600 range, gold started moving in a smooth channel with a slope of about 45 degrees. Smooth channels with a 45-degree slope are often sustained for a long time. Such was the case with gold.

As the chart shows, in 2011, gold broke out of the smooth channel in a parabolic move that resulted in exhaustion. Such a parabolic breakout from a smooth channel is often a medium-term top, and this was the case with gold. After exhaustion, gold traced a symmetrical triangle, which is shown on the chart. A symmetrical triangle indicates a battle between bulls and bears, with neither side able to prevail. Then came the break on the downside, bears won the battle.

The chart also shows Fibonacci retracement levels. Retracement of 50% to 61.8% also coincides with the target on gold based on the Quantitative Analysis Screen. This is the same target zone that I set when I gave a call to sell gold at $1904 after being a mega bull for a number of years.

Over years at The Arora Report, we have refined algorithms that detect footprints of different types of market participants from trading data across the world. The chart shows the zone where we believe the majority of buying was being done by the momentum crowd. The momo crowd buys gold and silver simply because everyone else in their social circle is buying gold and silver, they think it is going up, and they are scared of monetary policy pursued by the Federal Reserve.

The gold momo crowd keeps up the ruse that they understand inflation and history, but in reality, my experience is that unlike gold bugs, their knowledge is superficial. Further, the momo crowd misunderstood QE3 mortgage-backed security buying as inflationary, when in reality, it was not likely to have any impact on inflation.

The chart also shows the zone where Smart Money has been consistently selling, according to our algorithms.

Now look at the medium-term daily chart on gold. Please pay special attention to the down-sloping trendline. Gold bulls failed to penetrate this line on the upside in a meaningful way in the last six months. Every time gold approached the trendline, the Smart Money was selling to the unsuspecting momo crowd. Recent events caused only a weak bounce that did not even touch the trendline as shown on the chart. The last bounce on news from North Korea and Europe was even weaker. In the meantime, the chart shows that gold made a lower low.

Astute investors know the difference between short-term trades and long-term investments. We had downgraded gold and silver on Feb. 11, just before the recent drop in various timeframes based on our algorithms. These are the same algorithms that called for allocation of 20% of assets to silver for a long-term investment at $17.73, and then called silver to be sold at $45.00 - $50.00. Here are our current ratings on gold and silver.

Negative in the very short-term.

Negative in the short-term.

Negative in the medium-term.

Negative in the long-term.

Positive in the very long-term.

Negative psychology in the gold miners is evident from the fact that Barrick Gold ABX -5.46%   fell 8.36% Wednesday on relatively minor news, compared to the scope of this company, to halt work on the Pascua-Lama mine in Chile. Our favorite silver-miner short at this time is First Majestic Silver AG -5.24%  . We have recently taken profits on short positions in Silver Wheaton SLW -5.17%  and Hecla Mining HL -4.81%  .

Disclosure: Subscribers to the Arora Report are short SLV and silver miner AG.

Gold sinks over $60 to lowest since July 2011 Prices hit by technical selling; silver drops 5.3%

By Myra P. Saefong and Carla Mozee, MarketWatch


SAN FRANCISCO (MarketWatch) — Gold futures sank Friday, poised to settle at their lowest level since July 2011, as recent cuts to price forecasts continued to hurt sentiment, prompting investors to lose confidence in gold as a safe-haven investment.

Gold for June delivery GCM3 -4.28%   extended losses after downbeat U.S. retail-sales data, dropping $67.30, or 4.3%, to $1,497.60 an ounce on the Comex division of the New York Mercantile Exchange, on track for a weekly fall of nearly 5%.

“It’s pure panic bedlam on enormous volume,” said Gene Arensberg, editor of the Got Gold Report.

Based on most-active contracts, prices haven’t settled at a level this low since July of 2011.

Gold also fell along with other commodities as the dollar rose on a weak batch of U.S. data and as the psychological impact of potential selling of the precious metal from Cyprus continued to take a toll.

Gold these days “does not seem to respond adequately to the current financial and geopolitical situation,” said Frederic Panizzutti, senior vice president at MKS Group. “The rumors yesterday about Cyprus possibly selling some gold from its Central Bank reserves had a psychological impact resulting in some selling despite the fact that the amount of gold being mentioned could easily be absorbed by the market.”

Cyprus remained in the headlines Friday amid speculation the government was going to ask for more bailout money, which rattled commodities and underpinned the dollar. The country denied it would seek more help.

But despite the troubles in Cyprus, which are usually supportive for gold as a safe haven, investors have focused on Goldman Sachs’s cut to its gold forecast for 2013 to $1,545 an ounce, down from a prior forecast of $1,610. And minutes of the latest Federal Reserve meeting showed members were at odds about when to stop quantitative easing.

“The speculative funds are near-record short gold futures, so it is easy to understand why Goldman would make such a call, but with the trouble heating up in Europe again, and bonds being bid higher today, the move in gold is somewhat counterintuitive,” said Arensberg.

Overall, gold investors have now created an illusion that the metal is no longer a safe haven and that more declines are in the offing, said Chintan Karnani, an independent bullion analyst based in New Delhi.

More pressure

Also weighing on the dollar-denominated metal Wednesday, the dollar got a bid after poor U.S. economic data. Retail sales dropped by the biggest amount in nine months, falling 0.4% as Americans spent less at gasoline stations and many other stores in March, and exceeding the 0.1% drop that was expected. Oil prices also fell after that data was released.

The dollar index DXY -0.0024%  , which measures the greenback against a basket of six major currencies, rose to 82.267 from 82.153 seen in North American trading late Thursday.

Other data showed producer prices falling sharply in March.

Gold flat as stimulus buying fades, euro zone eyed

 NEW YORK: Gold traded flat on Wednesday, as renewed fears about a worsening euro zone debt crisis along with wider concern about the global economy dampened the metal's allure as a traditional inflation hedge.

Analysts said that some investors could take profits after gold had climbed for four consecutive months prior to October. The failure of recent rallies to break above $1,800 an ounce also triggered technical pressure.

The metal reached an 11-month high on Friday on hopes that the Federal Reserve, European Central Bank and other major central banks would continue pumping money into the global economy to stimulate growth, which has boosted gold's inflation-hedge appeal.

"Additional monetary policy easing in the United States and other countries is no longer fresh news, and so we do not anticipate further significant buying of gold based on monetary policy accommodation alone," said James Steel, HSBC's metal analyst.

Spot gold was down 0.1 percent at $1,762.70 an ounce by 11:10 a.m. EDT (1510 GMT). Bullion was still within reach to a 11-month high of $1,795.69, which marked the loftiest price since November.

US COMEX gold futures for December delivery were 40 cents lower at $1,764.60, with trading volume on track to finish sharply below average, preliminary Reuters data showed.

Silver, however, climbed 0.6 percent to $34.05 an ounce, boosted by better industrial-demand outlook as crude oil and base metals recovered after their recent losses.

Bullion tracked US equities lower, after the International Monetary Fund on Wednesday urged European policymakers to deepen the financial and fiscal ties within the euro area to restore sagging confidence in the global financial system.

Purchases of exchange-traded products (ETPs) reflected investors' positive outlook for bullion in the long term. Bullion backed ETPs rose to a record high on Oct 9.

A Reuters poll of 27 analysts released Wednesday showed they remained bullish on bullion in the long term. Analysts unanimously forecast a record high average price of $1,690.00 an ounce in 2012, up a touch from an estimate of $1,685.00 at the end of the second quarter and $1,765 suggested in January.

Analysts expect the metal to book a thirteenth successive year of gains in 2013, reaching an average price of $1,853.75.

Among platinum group metals that are mostly used as auto catalytic converters, platinum fell on signs that industrial unrest in South Africa, home to the largest platinum reserves, was abating.

Spot platinum was down 0.3 percent on the day at $1,674.75 per ounce, while palladium was down 0.2 percent at $651.47 an ounce.

Palladium also fell after data from China showed a decline in vehicle sales in September versus the year earlier period, the China Association of Automobile Manufacturers (CAAM) said on Wednesday.

Gold futures swing between gains and losses on USD strength

Gold futures swung between modest gains and losses in rangebound trade during U.S. morning hours on Tuesday, as ongoing concerns over Spain and Greece boosted demand for the U.S. dollar.

Lingering worries over the health of the global economy also weighed on sentiment.

On the Comex division of the New York Mercantile Exchange, gold futures for December delivery traded at USD1,775.55 a troy ounce during U.S. morning trade, easing down 0.02%.    

Prices were stuck in a narrow trading range of USD1,771.95 a troy ounce, the daily low and a session high of USD1,781.55 a troy ounce.

Gold prices were likely to find support at USD1,765.75 a troy ounce, the low from October 1 and near-term resistance at USD1,793.85, October 1’s high.

Market sentiment remained under pressure after the International Monetary Fund cut its global growth forecasts and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies.

The IMF said that the world economy will grow 3.3% this year, the slowest since the 2009 recession, and 3.6% next year, compared with July predictions of 3.5% in 2012 and 3.9% in 2013.

Investors also remained cautious amid uncertainty over how soon Spain may formally request a bailout lingered after euro zone finance ministers said Monday that Madrid did not need external financial aid yet.

Meanwhile, German Chancellor Angel Merkel said earlier that Greece was on a “tough path” following talks with Prime Minister Antonis Samaras in Athens, but one which she believed would pay off.

The talks came amid ongoing uncertainty over whether international creditors will extend loans to Greece, as the country struggles to meet deficit reduction targets.

The risk-off trade environment prompted investors to shun riskier assets, such as stocks and commodities and flock to traditional safe haven assets like the U.S. dollar and Treasuries.

The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, was up 0.3% to trade at 79.92.

A stronger U.S. dollar usually weighs on gold, as it dampens the metal's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.

Elsewhere on the Comex, silver for December delivery was dipped 0.02% to trade at USD34.01 a troy ounce, while copper for December delivery added 0.25% to trade at USD3.728 a pound.

Copper prices found support after the People’s Bank of China injected CNY265 billion into the money market, in a bid to ease tight liquidity conditions.

The move raised optimism for further supportive policy measures out of China, the world’s largest consumer of the industrial metal.

India to Review Gold Tax

But duty hike on Gold Bullion imports to stay...

IN A MAJOR reversal, India's government has said it will review the tax on unbranded gold jewelry, following 12 days of protests by gold traders across India, writes MineWeb's Shivom Seth in Mumbai.

Following an uproar in Parliament, the Indian government has stipulated that it will tweak the tax on gold jewelry but will not roll back the duty on gold imports,

The doubling of import duty on gold came in for severe criticism from opposition party members in India, during the debate on the Union Budget 2012-13 in Parliament. Allied political parties have joined the opposition members on the issue, in a bid to pressurize finance minister Pranab Mukherjee to consider a rollback.

Following the nationwide strike by jewelers, former finance minister Yashwant Sinha pressed for a rollback of the excise duty on non branded jewelry and called for doing away with the requirement of a PAN card to Buy Gold jewelry worth $3936 (Rs 2,00,000).

PAN or Permanent Account Number refers to a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department in India. It is a must to have a PAN number for all those who file their income tax returns. The recent budget has stipulated that any transaction at the jewelers over $3936 would necessitate a PAN card. Sinha has called for the practice to be abolished.

The budget proposal to include unbranded jewelry in the ambit of 1% excise duty on branded jewelry has led to protests and strikes by bullion dealers. Replying to Sinha, Pranab Mukherjee told members of Parliament, ``I understand the plight of small jewelers and an acceptable solution will be found. There is no intention to harass anyone. The argument was that all states were charging value added tax. When you can pay value added tax, you can easily pay excise duty. But let me assure that I am considering it.''

Key political ally DMK joined the opposition members in demanding a rollback of the hike. Participating in the budget debate, DMK leader Kanimozhi said, ``The increase in import duty on gold to 4% is bound to add pressure. It will lead to smuggling.'' Higher import taxes on gold would affect demand in India, where households view the precious metal as a saving instrument, she said.

In Parliament, the issue was raised by different political parties – Arun Jaitley from the BJP, Sukhendu Sekhar Roy of the TMC and Tapan Sen of the CPI (M). West Bengal's industries and commerce minister, Partha Chatterjee, and TMC members have written to the Centre asking for a review in customs duty on gold and excise on jewelry.

While agreeing to reconsider some of the tax proposals on unbranded jewelry, Mukherjee reiterated his resolve to bring jewelers under the tax net under a new formulation. He also made it clear that he needed more time to study the legal implications of whether or not it would come into force immediately.

"I know it (gold) is part of our culture...but the import of gold of such magnitude strains balance of payments and affects exchange rate of the rupee through impacting supply-demand balance of foreign exchange,'' Mukherjee told Parliament members. He expressed concern over the out flow of precious foreign exchange on the import of ``dead assets that cause problems in the country.''

Referring to gold mined in India, he said, the quality of the country's gold bearing ore was ``extremely poor'' and as a result, it was uncompetitive to mine such ore to produce the precious metal indigenously.

India has around 30 gold mines. Each tonne of Indian gold bearing ore yields only 22 grams of gold, Mukherjee said, adding that experts opine that unless each tonne of ore does not produce 45 to 50 grams of gold, then the exercise becomes uncompetitive.

India produces around two tonnes of gold a year against the imports of 900 tonnes, he added.

Though the government has said there will be no step down from the import duty hike on gold and platinum to 4%, the government's proposal "to come out with an acceptable formula'' has left jewelers undeterred in their fight for a rollback, with most deciding to continue with the strike.

Jewelers in Nashik, Maharashtra have decided to continue their strike indefinitely. A decision in this regard was taken at a meeting organized by the Maharashtra Gold Jewellers' Association in Mumbai.

A delegation of the All India Gems and Jewellery Trade Federation recently met the All India Congress Committee member Digvijay Singh, who has assured the delegation that he would discuss the matter with Congress president Sonia Gandhi and Prime Minister Manmohan Singh.

Bachhraj Bamalwa, chairman of the Federation which called for the nationwide strike said members would continue with their demand to roll back the import tax hike.

"Though the finance minister has shown optimism in his speech, we will continue with the strike and will open our shops only after the excise duty and tax on cash purchase are rolled back,'' said  Zaveribhai Shah, president of the Jewellers Association, Ahmedabad.

US gold and copper slide as dollar steadier

NEW YORK, March 29 (Reuters) - U.S. gold futures slipped

Thursday as the dollar recovered and copper eased more following

its weaker performance in the previous session.

       
     FUNDAMENTALS
     * Gold prices slipped under $1,680 an ounce, extending a
fall from 2-week highs into a third session as the dollar
recovered from near a one-month low and crude oil values turned
lower.
    * Copper was off following a 2 percent fall in the previous
session although doubts over demand in China and the pace of
economic recovery in the U.S. made investors cautious.
    * China's Minmetals Resources plans to use its C$1.3 billion
Anvil Mining acquisition as a platform to buy more copper assets
in central and southern Africa.
    * South Korea's Hyundai Steel expects the steel market to
recover in the second half of this year led by a pickup in
automobiles and construction despite high oil prices, weak
Chinese demand and euro zone debt issues.

    ECONOMY
    * Germany's March unemployment rate fell to 6.7 percent from
6.8 percent in February.
    * The March euro zone economic sentiment index fell 0.1 to
94.4, compared with the expected 94.6.
    * Final fourth quarter U.S. GDP at 0830 EDT (1230 GMT) is
seen unchanged from the second estimate at 3.0 percent.
    * U.S. initial jobless claims at 0830 EDT are expected at
350,000, up from last week's 348,000.
         
    MARKETS
    * Global stocks dipped after disappointing U.S. data
tempered the outlook for the world's biggest economy while the
price of oil stabilized following some sharp losses.
    * The euro fell against the dollar as concerns about
contagion from the euro zone debt crisis overshadowed a solid
Italian bond auction.
   
 Prices at 7:17 a.m. EDT (1117 GMT)                      

                               LAST      NET    PCT     YTD
                                         CHG    CHG     CHG
 US gold                    1655.60    -2.30  -0.1%    5.7%
 US silver                   31.825   -0.006   0.0%   14.0%
 US platinum                1635.40     0.20   0.0%   16.8%
 US palladium                647.50     0.15   0.0%   -1.3%
 US copper                   377.05    -2.20  -0.6%    9.7%
   

The Gold Sector Is On Sale: Michael Fowler

Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon sees small- and mid-cap junior producers and developers as the "sweet spot" in the gold equities space, and provides a basket of names to consider in each space. In this exclusive Gold Report interview, he also shares his views on the irresponsibility of the "new paradigm" of large-scale financings now in vogue.

The Gold Report: Let's start with the changing risk picture in the gold space. Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Kinross Gold Corp. (K:TSX; KGC:NYSE) are down by about 50% and 75%, respectively, from their 52-week highs. Both would once have been considered low risk. Are there no low-risk companies in the gold space today?

Michael Fowler: I think that is correct, Brian. Right now, any gold stock is fairly risky due to a combination of factors. First off, gold stocks and the gold price are very volatile. Second, gold mining is a tough business, subject to unforeseen circumstances. Despite the size of Agnico-Eagle, Kinross, even Barrick Gold Corp. (ABX:TSX; ABX:NYSE), I would attach a fair degree of risk to each.

TGR: If investors have to assume risk with gold equities, does it make sense to go with small- and mid-cap companies where the rewards can be higher?

MF: Yes, I think investors should be more focused on junior producers and, to some extent, explorers. That is where you will get the most gain. 

For example, since 2004, Barrick's share price has risen 12%/year, whereas the share price forRandgold Resources Ltd. (GOLD:NASDAQ), a junior producer, rose more than 40%/year. 

TGR: Before we leave the large caps, will companies like Agnico and Kinross get takeover bids this year?

MF: I do not think Agnico or Kinross will be taken over because the senior gold companies are learning that mega-mergers do not make much sense; they have not brought superior returns for shareholders. 

The other thing having an impact on the mergers and acquisitions space is that the share prices of the potential acquirers are declining. They no longer have currency for acquisitions. 

TGR: On March 14, the gold price dropped $40/ounce (oz); in late February it crashed $110/oz in one day. Is this due to the perception of a strong U.S. economy, or is that too simplistic?

MF: I think that is correct and somewhat simplistic. Before the recent release of good economic data, the feeling was that the Federal Reserve would enter into a third round of quantitative easing (QE3), to increase its balance sheet and monetary liquidity. Now that the U.S. economy is moving along at a reasonable, although slow, clip, the Fed is hesitant to go the QE3 route. As a result, gold has sold off.

TGR: Should we expect more of the same in 2012?

MF: While gold will be difficult in the short term, my thesis on gold is very bullish. The whole world is involved in increasing both the money supply and liquidity. Interest rates are very low and it seems as though the Federal Reserve will not increase them for the time being. Countries around the world are engaging in almost competitive devaluation of their currencies. For the longer term, this is very good for gold. 

TGR: When do you expect that uptick to occur, perhaps when the next battle over raising the U.S. debt ceiling starts? 

MF: That would help, I suppose. When the U.S. presidential election gets closer, there will be more fuel for gold. For the next month or so, gold will have a problem but after that, it will turn around.

TGR: Your varied coverage in the gold space generally consists of small producers and near-term developers. Are they the sweet spot in the gold space in terms of risk versus reward?

MF: Yes, in particular the junior producers. Eventually, the developers and explorers will catch investors' interest. We focus on this area because: number one, we see ourselves delivering service to our clients; number two, we believe the returns in the smaller cap names will outperform the larger caps.

I think the whole of the gold sector is on sale at the moment, although you have to be selective in where you invest.

TGR: What is the risk profile of the one-mine miners and developers versus the majors? 

MF: Quite frankly, it is high. In general terms, a multi-mine company has lower risk than a one-mine company. However, if you have one really good mine, that is better than having a number of very poor mines. 

Among developers, their biggest hope is to be taken over because the history of developers going on to be producers is not very good at all. 

I would recommend having a basket of junior producers and developers, such that you are not dependent on one particular company that could blow up. 

TGR: For developers, is this the best place to be just before they bring the mine into production?

MF: No. I'll expand on the answer to that question; there are various stages. The first place to be is in companies that have one or two mines and look to be growing by 20–25%/year.

The next place to be is in an emerging producer with good grades that could work out well. Lastly, I would suggest a developer that is likely to be taken over in one or two years.

TGR: Why are producing companies performing so poorly, given that most of the feasibility studies on their mines were done using a gold price of $1,000/ounce, hundreds less than the current price? 

MF: I think there are numerous factors behind that. One, investors can avoid all of the issues producers present by putting money into exchange-traded funds. Two, there have been some production hiccups recently, Agnico-Eagle among them. Three, some equities have been over-diluted. I have been critical of deals made where the company did not need the money, but nonetheless diluted its share base when the performance was not there. Four, there has been cost and capital inflation in the sector. 

TGR: One example of that is Lake Shore Gold Corp. (LSG:TSX). It just cannot get its price above $1.60/share, although it was well above $3/share not that long ago. 

MF: Lake Shore has been underperforming in terms of production expectations, and it is a very good example of what is going on in the industry right now, but Lake Shore is not alone. Kinross blew up because it paid too much for an acquisition. There have been all sorts of disappointments, which is one of the big reasons gold stocks look very cheap right now.

TGR: Do you remember another time when gold equities performed so poorly versus the gold price?

MF: The 2008–09 debacle comes to mind, but that was less to do with gold equities and more to do with the risk environment in the general market. Gold prices stayed fairly firm then, but gold stocks got clobbered in the risk-averse trading that went on. 

TGR: Should investors be concerned?

MF: They certainly should take account of what is going on. The good news is that many gold producers are showing margin increases because the gold price has gone up faster than cost inflation. 

There is a ray of sunlight coming through. We will not return to the same multiples we were at in the 1990s and mid-2000s. Instead, we will go back to something closer to the mean. Longer term, margins will continue to increase, earnings will go up and, eventually, so will stock prices.

TGR: Let's get to some of the companies you cover. Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A)operates the Casa Berardi gold mine in Québec, which is scheduled to run until 2020 or 2021. How does Aurizon plan to augment its production profile between now and then? 

MF: The main factor is its Joanna development project, located on the Cadillac break in Québec. It is going through a feasibility study right now, and indications are that it could be producing more than 100,000 ounces (100 Koz) out of Joanna by 2014. This would augment production from Casa Berardi, which produces about 160 Koz/year. 

Aurizon can also increase production at Casa Berardi, whose many potential working faces give it flexibility. In total, Aurizon's potential production is in the 240–270 Koz range, compared to the 160 Koz it is now producing. 

TGR: Its Marban exploration property also looks interesting. 

MF: Whether Marban will be a mine is a little bit up in the air at this moment. The interesting area at Marban is something like 200–300 meters below the surface. I think Aurizon would dearly love to see something closer to the surface in an open-pit scenario. I think the jury is still out on Marban. 

TGR: Does Aurizon have any upcoming catalysts for investors to look forward to?

MF: I think its Q411 financial results would be one. [Ed. note: after the interview Aurizon released Q411 financial results, including earnings of $21.8M, up from $7M in Q311.] It has been doing pretty well at Casa Berardi. That is not an easy mine, but Aurizon is cranking cash flow out of it. 

The main catalyst will be the feasibility study at Joanna. The company lowered the expectations for Joanna close to a year ago. A robust number out of Joanna will catalyze Aurizon's share price. 

In addition, Aurizon Mines is a fairly cheap stock for a producer compared to others. 

TGR: What is another store in your coverage universe?

MF: We like Northern Freegold Resources Ltd. (NFR:TSX.V). A lot of the Yukon plays are limited to helicopter trips into their properties, while Northern Freegold benefits from a road and a nearby power line. The property is a large, porphyry-style project. It hosts about 6 million ounces (Moz) gold equivalent (Au eq), 2.8 Moz gold per se, with copper in the deposit. The stock trades at $5/oz on an Au eq basis, which is exceedingly cheap, compared to an average of around $50/oz or so. There is a lot of potential to increase the resource. 

TGR: Why is it meaningful that this is a porphyry system?

MF: In this case, it means it is a large, open-pit, fairly low-grade deposit. You have to be a little careful with this type of deposit, making sure it is near infrastructure and that the geometry and metallurgy of the deposit are good. Northern Freegold has gone some way down the path of assuring those things. It also has new management, which is making great efforts to make people aware of its story.

TGR: This is a copper-gold-molybdenum deposit. Large copper-gold deposits have been developed in British Columbia (B.C.) before, but not in the Yukon.

MF: Correct. Some B.C. mines have fewer infrastructure advantages than this one, so there's no reason why the Yukon couldn't have a large open-pit type of operation.

Western Copper and Gold Corp.'s (WRN:TSX; WRN:NYSE.A ) Casino project is just down the road. It is going through a final feasibility study and the company is very optimist about bringing its porphyry deposit into production. I think Northern Freegold actually has infrastructure advantages over Casino.

TGR: Can you give us another name?

MF: We like Fortune Minerals Ltd. (FT:TSX), with two very large projects. One is NICO, a cobalt-gold-bismuth-copper deposit. It has about 1 Moz gold. That project has a full feasibility study and is going through a permitting study now. I think the company would like to joint venture NICO into production. 

The other is the Mount Klappan coal project. It is anthracite, better known as metallurgical coal. Because our focus is gold, I will be brief. Metallurgical anthracite can be used in producing steel, and there is a tremendous market demand right now. The company's partner at Mount Klappan is Pohang Iron and Steel Co (PKX:NYSE), also called POSCO.

If you add the net present values of those two projects together from the feasibility studies, you arrive at close to $5/share for each Fortune Minerals share, at an 8% discount rate. It is now trading around $0.96/share. I see a lot of value here. I think that joint venturing the copper-gold deposit at NICO will take out the financing risk and the share price should gain as a result.

TGR: You are on a roll, Michael. Do you have any other names you want to discuss? 

MF: Clifton Star Resources Inc. (CFO:TSX.V) is trading around $1.75/share. It has a project close to Rouyn-Noranda, Québec. To my mind, Québec is almost the best place in the world to find a deposit. Its Duparquet project has already outlined 3 Moz gold in several NI 43-101 reports and will release a revised resource in April. I think it may be closer to 5 Moz gold at 0.5 gram per tonne cutoff. 

Earlier, the B.C. Securities Commission cease-traded this stock because it found disclosure deficiencies. Now, new management is in place and the fundamentals and the resource are still there. We feel it has good potential for becoming a mine and for a joint venture or being taken out in time. 

I should mention that Osisko Mining Corp (OSK:TSX) was in a joint venture with Clifton Star, but Osisko walked from the project because it didn't see it as a Malartic bulk-tonnage situation. The mineralization is more discrete, but that does not take away from its mineability.

TGR: Is Clifton Star undervalued given the recent changes?

MF: I think so. We like to see valuations below $25/oz in the ground, and to some degree, that is why we picked Northern Freegold and Moneta Porcupine Mines Inc. (ME:TSX.V). Clifton Star trades at $25/resource ounce, based on a $5 Moz project. That valuation includes the fact that Clifton Star will have to raise approximately $50 million (M) to fulfill its obligations as an option to buy 100% of the property. 

TGR: Tell us about Moneta Porcupine and its project on the same fault line as Clifton Star's. 

MF: Aurizon Mines, Clifton Star and Moneta are all on big, east-west fault lines. Moneta Porcupine is on the Ontario side of the border with Québec, on the Destor Porcupine Fault. Moneta recently came out with a very pleasantly surprising resource on what it calls the Golden Highway project of 3.14 Moz gold. It trades at roughly $10/oz in the ground, which is cheap. Moneta seems to be successfully tying up some of the pits outlined in its resource study.

TGR: Is it difficult for juniors like Moneta Porcupine and Clifton Star to raise money, given that they are pure exploration plays?

MF: The financing environment is a bit eclectic at the moment and probably is getting worse as we speak. But there is money out there, focused on selective companies or selective deposits. 

We usually find that the time to invest in a company is when essentially nobody likes the sector. You do not want to be buying when every institution is buying; that is a good signal that you are on a high.

I want to emphasize that we have seen a lot of companies raise $20M or $30M when they did not need the money. There is a new paradigm going on. We used to raise money for one or maybe two field seasons, and the amount raised was $5–10M, maximum. Today, some of these guys are raising $30–40M. Quite frankly, I think that is irresponsible. 

TGR: That's a pretty brash statement. 

MF: Over-equity dilution depresses the company share price. From the companies' perspective, managements are running scared. They say that they have to raise money now to take care of themselves for many years.

But you have to ask why institutions are giving juniors money every time they come back to the well. If you give a company $40M, you will not see that company for the next five years; it can do anything it likes with the money. Management no longer has any incentive to perform on the exploration programs. There is no accountability in the one- to two-year time horizon. 

I do not think that is a good thing.

TGR: Do you have any other parting thoughts for us? 

MF: I realize that I have talked a lot about problems, but essentially I believe the gold price will rise. In particular, junior producers will be the first to start moving, their cash margins will increase and their earnings will rise. Then, some of these junior explorers and developers will participate in the upcoming bull market. 

TGR: Michael, thank you for talking with us today. 

Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon Ltd., has worked in the investment industry since 1987 as a base and precious metals mining analyst for numerous high-profile firms. His coverage list included the major North American gold mining companies, but is now focused on small- to mid-sized companies. Previously, Fowler worked as a geophysicist involved in mineral exploration for 10 years. He was involved in the discovery of the high-grade Cigar Lake uranium mine in Northern Saskatchewan in the early 1980s. Fowler holds a Master of Business Administration from Cranfield University, UK; a Master of Science in mineral exploration from Leicester University, UK; and a Bachelor of Science in geology with geophysics from Liverpool University, UK. He is a member of the Institution of Materials in the UK and a member of the Canadian Institute of Mining and Metallurgy.