Gold – Quo vadis?

Piero Faroldi, Product Specialist at Lombard Odier, provides an update on the gold market as well as the current positioning of the LO Funds–World Gold Expertise: Lombard Odier Investment Managers | 20.03.2015 09:07 Uhr
Archiv-Beitrag: Dieser Artikel ist älter als ein Jahr.

In February, market attention moved away from global financial risk to US monetary policy expectations. The market seems more focused now on the timing of the expected interest rate hike by the US Federal Reserve, and less on the financial issues (primarily in Europe) that drove the price of gold up in January. And, as negotiations toward a Greek bailout plan progressed throughout the month, there was less concern about the situation in Greece and the ramifications of a potential separation from the Eurozone. As a result, gold dropped 5.5% to USD 70.55, and closed at USD 1213.22 per ounce as at February 27.

On 6 February, a stronger than expected US January employment report, saw USD 30 off the gold price in one day. On 17 February, gold lost another USD 20 ahead of the Chinese New Year, as markets priced in an expected drop in demand post festivities. Gold traded at an intra-day low of USD 1,190.49 on 24 February, following remarks by Federal Reserve Chair Janet Yellen, and as the market speculated on their effect on rate hike timing expectations.

Another month of net inflows for gold bullion exchange-traded products is also, in our view, providing support for gold at present levels. After a decline of over 40% in holdings during 2013 and 2014, an increase of 5% in the first two months of this year is positive.

The World Gold Council published its gold supply and demand statistics for 2014. Total gold demand is estimated at 3,924 tonnes in 2014, a 4% drop year-on-year, which isn’t surprising given that 2013 was a record year for consumer demand. Jewellery demand was down 10%, although 5% above its five-year average. Positively, central banks were net buyers of 477 tonnes of gold in 2014, 17% higher than in 2013, and the second highest year of central bank net purchases in 50 years (after 544 tonnes in 2012). Russia was the largest buyer, accumulating an additional 173 tonnes in 2014. Total supply was relatively flat, with growth in mine supply offset by a decline in scrap supply.

Despite a decline in the gold price, gold stocks outperformed Gold in February. Gold fell by 5.5%, the NYSE Arca Gold Miners Index (GDMNTR) fell 4.2% and the Market Vectors Junior Gold Miners Index (MVGDXJTR) dropped 3.2%. We believe this outperformance of stocks relative to metal reflects just how historically undervalued these equities are at present, and also an improvement in investor sentiment towards gold companies, which now seem to be in a much better position.

Most of the larger companies have now reported their fourth quarter and full year results for 2014. Although some failed to meet their 2014 production and costs targets, the majority met or exceeded expectations. Operating guidance for 2015 was generally in line with expectations, with both production and costs fairly flat relative to 2014, but some companies did indicate increases in production and lower costs. We expect 2015 costs could be lower than guided as a result of both lower energy prices and weaker currencies, but that the effect of weaker currencies will be more significant than the impact of lower oil prices. Companies also released their updated reserve and resource statements as at 2014 year end. With very few exceptions, primarily as a result of asset acquisitions, most were unable to replace the gold ounces mined in 2014, and reserves dropped 10-15%. The gold prices used to estimate reserves at the end of 2014 were broadly in line with those used in 2013 (USD 1100-1300 per ounce). This is in contrast to 2013, when most estimated reserves used gold prices materially lower than those assumed in 2012, leading to a massive reserve write-down in the sector.

While we believe the gold price in the shorter term may continue to bounce around $1,200 per ounce, in the longer term, financial stress has the potential to drive gold higher. The good news for the Fund is that companies now seem ready to capitalise on a rising gold price. At these gold prices, lower cost producers, which are overweight in the Fund, are profitable and some select companies still offer growth prospects.

One of these is Goldcorp which is presently ramping up production at two new mines (Eleonore, in Canada and Cerro Negro, in Argentina) as well the Cochenour project (also in Canada). Goldcorp’s experience in Argentina is a good example of the challenges the gold sector faces in growing production. Goldcorp could have chosen to pass on the opportunity to develop the high quality Cerro Negromine, which contains more than 5 million ounces in reserves, simply to avoid the Argentina risk. Instead, despite some difficulties, it has developed a mine that is expected to grow the company’s production by about 15% this year. Gold companies have to assume and manage a large number and variety of risks, including country risk, if they are to grow their business. The reward for overcoming these risks is a mine that can generate attractive returns for shareholders. And now, with the coming presidential elections, we expect a much more business friendly environment in Argentina going forward.

Piero Faroldi, LO Funds–World Gold Expertise

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