What follows is excerpt from John Ing’s January gold report. Ing is a gold analyst and President of Maison Placements Canada in Toronto.
Gold was up last year for the 12th consecutive year, the longest in at least nine decades. Gold rose 7% last year, spurred by ETFs as well as central bank buying. Gold has rallied from $250 an ounce, moving almost eight times to a high at $1,920 in 2011, but still shy of the inflation adjusted price of $2,500 an ounce.
However, gold lately has not been as precious, frustrating both bulls and bears despite fears about the US economy, political gridlock and more quantitative easing. In the past, these influences would act as a catalyst for stronger prices.
Central banks are the largest official holders of gold with some 31,000 tonnes of gold in their vaults. In fact, they have been big buyers with more than fifteen banks on the buy side in an effort to diversify their reserves in response to growing concerns about a weaker US greenback.
Under Basel 111, gold was rerated from a Tier 3 asset to Tier 1, allowing banks to buy or hold gold instead of sovereign bonds.
Central bankers will continue to be big buyers of gold. However, ETFs or the people’s central bank established in 2003 bought some 2,632 tonnes, holding slightly less than the IMF with 2,814 tonnes.
Although nearly 40% of the world’s supply is recycled, the only source of new supplies are the gold miners, which lost nearly 25% [of stock market value] since late 2011. Miners’ cash costs are a concern as mega-billion projects bring mega problems.
But the industry has got religion. Most will emphasize profits over growth. Dividend hikes are likely and M&A actually will see the cast-offs of higher cost mines and/or emphasis on less riskier geopolitical areas.
Growth has given way to profits. Moreover, we expect emerging signs of a shortage of physical gold as gold miners’ production peaked. To supply this demand, the gold miners produced only 2,700 tonnes of gold annually. The only other source of gold is the estimated 22,000 tonnes in-situ reserves held by the gold miners in the ground, but that must be extracted at a cost of $1,000 an ounce.
We believe the in situ-reserves will be more highly valued, causing a reversal of the equity downtrend. The bull market for gold shares has just begun.
Gold stocks have never been so cheap
Chinese gold demand fell in the third quarter due in part to the lull before the leadership change. We expect a resumption in demand that will see China consume more gold than any other nation, beginning in the current quarter. China alone has 1,084 tonnes, however that represents less that 2% of its reserves.
If China were to increase its holdings to 10%, that could represent at least three years of the world’s output.
Still, China is the fifth largest holder behind the United States. It remains the largest holder with 8,133 tonnes held at Fort Knox.
It doesn’t matter then, who owns the gold, whether a central bank, ETF or my wife. Gold has the same value whoever owns it. Gold has been range bound. In the short term, gold needs to break through $1,700 an ounce. Gold is a hedge against the consequences that the world’s central banks will eventually ignite inflation. This fear also explains why the idea of a return to a gold standard has appeal, particularly when every major currency has fallen against gold.
Gold has simply become the world’s new global currency. Gold is a hedge against debasement of currencies as well as an asset of last resort among central banks and investors. As such, we have raised our new target to $10,000 an ounce. While $10,000 may seem outrageous, gold rose nearly 2,500% from 1971 to 1980 but is only up 550% from the lows of 12 years ago. There is a lot left in this bull market.
Ing’s stock recommendations
Agnico-Eagle Mines Ltd. (TSX: T.AEM, Stock Forum) (NYSE: AEM, Stock Forum)
Agnico-Eagle is Canada’s fifth largest gold player and recently raised its production guidance to 650,000 ounces due to the turnaround at Meadowbanks in the Canadian Nunavut. We like Agnico here for the growth in production and reserve potential.
Barrick Gold Corp. (TSX: T.ABX, Stock Forum) (NYSE: ABX, Stock Forum)
Barrick is losing its luster. Barrick reported a disappointing third quarter amid investor concern that the Pascua Lama gold project on the Chile/Argentine border will turn out to be the world’s most expensive gold mine, with a price tag of $8.5 billion. We believe Barrick should retrench, spinoff assets and get back to its core business of making money from gold mining.
Excellon Resources Inc. (TSX: T.EXN, Stock Forum)
We expect Excellon to produce 1.5 million ounces this year with excess cash flow to fund an ambitious exploration program and consolidation in Mexico and Timmins, Ontario where Excellon has developed a second leg with the acquisition of Lateegra Gold Corp. and its assets in Timmins. Excellon has $11 million in cash. An experienced board and promising exploration upside makes this junior a top pick this year.
IAMgold Corp. (TSX: T.IMG, Stock Forum) (NYSE: IAG, Stock Forum)
IAMgold took a hit in the third quarter due to a drop in production to 188,000 ounces from 250,000 ounces a year earlier. As such, IAMgold lowered its guidance to 840,000 with a rise in cash costs. In addition, teething problems at Essakane as well as Rosebel in Suriname hurt production guidance. IAMgold bet $600 million on Cote Lake in Northern Ontario and the company is drilling off that deposit. At the earliest, Cote Lake won’t be in production until 2017. However, we believe continuity will be a problem and that Cote Lake will be difficult and prove expensive to bring into production. Ing has a sell rating on the stock.
Kinross Gold Corp. (TSX: T.K, Stock Forum) (NYSE: KGC, Stock Forum)
Kinross reported a better third quarter with slightly improved production of 672,000 ounces and higher cash costs of $677 an ounce, due to gains at Fort Knox and the Kupol mine in Russia. However, problem-plagued Tasiast mine in Mauritania was affected by inconsistent grade quality and the company is working on another revised mine plan. Despite newly minted CEO Paul Rollinson’s cost control measures, we still believe it is too early to purchase Kinross. Kinross expects to produce 2.5 million ounces this year. We prefer Eldorado at this time.
St Andrew Goldfields Ltd. (TSX: T.SAS, Stock Forum)
St. Andrew Goldfields had a record fourth quarter and produced almost 96,000 ounces in 2012. We continue to like the company here, believing the shares are the best vehicle to play the Timmins, Ontario gold camp.