Earlier today I saw the accompanying graph that shows a map of the world and that most of the population is contained within a circle over Asia.  It then dawned up me that most of the bullion that is currently being purchased is also occurring within this circle.

The developed world experienced a post-bullion-ETF-craze hangover over the last couple of years.  However, in the developing world, gold is still seen for its “store of wealth” qualities where the intention is to hand it down from generation to generation.  These buyers are effectively immune to the debate on how the price of gold should act vis-à-vis current global monetary policies and current inflation levels.

In China, India, and other countries in the region, people see physical gold as being “on sale” and are buying opportunistically.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

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 January 5, here is the SWOT for the gold market.

Strengths

• According to Bloomberg, gold analysts are the most bullish in a year on speculation that investors are covering near-record short positions. Following the first annual decline in 13 years, fifteen analysts surveyed by Bloomberg expect gold to rise this week, while two are bearish and four are neutral; that is the highest proportion of bulls on record since December 2012.
• Tiffany & Co., the world’s second-largest luxury jeweler retailer, reported a 4 percent increase in holiday sales, with positive sales growth in all regions. Demand was largely driven by an 11 percent increase in Europe, a 6 percent rise in the Americas and a 5 percent boost in Asian sales.
• Klondex Mines, the Nevada based high-grade producer that recently purchased Newmont’s Midas mine, was featured in Grant’s Interest Rate Observer this Friday. Pierre Lassonde, the legendary Chairman of Franco-Nevada, commented that Klondex is expected to do 150,000 ounces a year at a very high grade, resulting in one of the lowest costs in the industry. In addition, Lassonde gave a vote of confidence to CEO Paul Huet, who demonstrated an exceptional knowledge of the deposit and the Midas mill while working for him during his tenure at Newmont.

Weaknesses

• India’s Economic Affairs Secretary Arvind Mayaram announced that the restrictions on gold imports are likely to continue until at least the end of March, unless a significant improvement takes place with regard to the nation’s current account deficit. It is worth mentioning that pressure has been building as Central Bank Governor Raghuram Rajan has voiced his inclination to remove the restrictions, which encourages smuggling.
• Bank of America lowered its 2014 gold price forecast by 11 percent to $1,150 per ounce, arguing that physical purchases from Indian and Chinese buyers will weaken. In a similar note, ABN AMRO analysts say gold may drop back below $1,180 per ounce if U.S. macro data continues on the strong side.
• Scotia Mocatta had a look at the continued redemptions in gold ETF products, which have not ceased in the new year. In its view, good macro data is encouraging further liquidations as investors continue to look for “risk on” trades. The most recent behavior revalidates the opinion of some analysts who argue the gold price has dissociated itself from ETF flows, forming a bullish, technical double bottom – a trait that has evidenced quite strongly this January.

Opportunities

• The Swiss National Bank’s gold holdings are the target of a national initiative and called by citizens collecting signatures, demanding that at least 20 percent of the central bank’s assets be in the form of gold. The measure would also bar the central bank from selling any of its holdings and would require the repatriation of the SNB’s gold holdings with the Bank of Canada and the Bank of England.
• Valuations of gold miners are approaching their cheapest relative to book value in at least two decades, precisely at the time when free cash flow generation has bottomed and cost reductions are kicking in. The current valuations present opportunities for junior miners to acquire mining assets, just like Northern Star Resources did by purchasing the Plutonic mine from Barrick, based solely on the value of the proven and probable reserves.
• The recent shift in Canadian government policy is having a pronounced effect on the value of the “loonie,” or the Canadian dollar. The Canadian government appears to have shifted gears and decided that a weaker currency, via monetary policy accommodation, is now required to hasten the rebalancing of the Canadian economy. The implications for Canada’s exporting industries, which encompass gold producers, are enormous. We discussed earlier how a decrease in the value of the Canadian dollar could effectively erase any losses arising from declining gold prices for those producers with large, Canadian portfolios such as Agnico Eagle Mines.

Threats

• The macro economy in the U.S. could have started the year off a little better. This Friday, the official jobs report for December showed a net creation of 74,000 jobs, far too short of the market forecast for a 200,000 net job creation. The reading should be seen as an opportunity to reevaluate economic assumptions, to rebalance portfolios and to awaken from complacency before the market turns.
• Just before Christmas, the Zimbabwe budget included a provision that indicated to the implementation of a raw material export tax, specifically on platinum group metals. The government has called a meeting with the Chamber of Mines, Impala and Anglo American to discuss a possible 15 percent levy on platinum group metals exports.
• After shedding some 30 million ounces of gold from a high of 85 million ounces, David Rosenberg of Gluskin Sheff believes it is fair to ask whether the fire sale is done. According to Rosenberg, sentiment could scarcely be more negative, with even the good macro data looking like it is priced in. What’s most interesting to see is that gold and bonds declined in the same year – a very rare phenomenon. The most recent memories of this trend occurring have coincided with gold market bottoms, in which market players shrug their shoulders at the mention of gold.

See the strengths, weaknesses, opportunities and threats of the gold market every week by subscribing to the Investor Alert. It arrives in your email inbox every Friday evening and best yet, it’s free.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 12/31/13: Agnico Eagle Mines, Barrick Gold, Franco-Nevada, Klondex Mines, Newmont Mining, Tiffany