Hedge funds’ bullish bets on gold jump to four-year high
Hedge funds and other large speculators boosted their net-long position in gold.
Amid a fresh sell-off on US equity markets (now in negative territory for the year) and a recovering crude oil price lifting general sentiment on commodities markets gold took a stab at the psychologically important $1,200 an ounce level on Wednesday.
Gold for delivery in April – the most active futures contract – gained over $8 or 0.7% hitting a day high of $1,199.72, before pulling back slightly in afternoon trade. The gold price is up more than 4% from its 2015 low of $1,148.20 an ounce hit last week. It was only the third time since April 2010 that the futures price closed below the $1,150 an ounce level.
Gold which usually moves in the opposite direction has shown some resilience against the rampant dollar this year and the metal on Wednesday made the most of a retreat in the currency to a near three-week low.
The greenback slipped further below the 100-mark against the world’s major currencies on the back of dovish comments from the US Federal Reserve and doubts about the strength of the US economy leading to a diminished likelihood of an early rate increase.
At just over 97.1, the world’s reserve currency is still up 21.3% over the past year and within shouting distance of 12-year highs. That compares to a record low of 71.6 in April of 2008 and a record high of 164.72 in February 1985 when the price of gold bottomed at $284.25 an ounce.
Platts News on Wednesday quotes from a research note by Anglo-Hong Kong bank HSBC expressing “cautious optimism” about the gold price outlook for 2015. The bank which has extensive bullion dealing are now predicting a trading range of $1,120 – $1,305 with an average price of $1,234 in 2015:
“The possibility that deflationary pressures could bring on negative rates in some economies helps reaffirm our cautiously optimistic view on gold,” head analyst James Steel said.
“The likelihood that the dollar rally may be near ending as suggested by HSBC’s currency research team is another possible reason supporting modestly higher gold prices,” the analyst said.
Fundamentals factors are also supportive of a stronger gold price and the precious metal is not “entirely hostage” to monetary developments says HSBC. Low prices are discouraging scrap supply and the slump below $1,150 “may be encouraging greater demand from price sensitive emerging market buyers, notably, but not exclusively, in India and China.”
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Lake Shore Gold (TSX: LSG; NYSE-MKT: LSG) appears to be checking off all the boxes, when it comes to a junior producer with gold assets in a safe mining jurisdiction, that is generating free cash flow, has manageable debt and an exciting growth potential, topped with a good management team that delivers on its promises. The junior exited 2014 with solid numbers from its two gold mines in Ontario, despite the continuing slump in gold prices. The Timmins West and Bell Creek mines generated 185,600 oz., up 38% from 2013, and above the firm’s target of 160,000 to 180,000 oz. Operating costs and all-in sustaining costs both improved by 23% to US$592 per oz. and US$872 per oz., respectively, coming in well below the low-end of the cost guidance. Along with the record year for production and costs, the junior grew its year-end 2014 cash and bullion position by roughly 80% to $61.5 million. This is after it paid off $45 million or most of its senior secured debt with Sprott Resource Lending Partnership, including $15 million for a gold-linked note and $30 million on a standby line of credit. The junior was able to make those repayments following the increase in its free cash flow on the back of the improved performances from both the Timmins West and Bell Creek mines. Lake Shore had free cash flow of $54 million in 2014, before the debt repayments, compared to a negative free cash flow in 2013, notes Haywood Securities analyst Kerry Smith. Revenue in 2014 grew 33% to $256 million as higher sales offset lower gold prices. Lake Shore sold 183,300 oz. gold at an average price of $1,398 per oz. (US$1,269), compared to 135,600 oz. sold at $1,422 per oz. (US$1,377), in the earlier year. Net earnings totaled $23.6 million, versus a net loss of $233.5 million in 2013, where the firm booked a $225 million impairment charge. Adjusted 2014 earnings were $28.6 million, or 7¢ per share, compared to the adjusted loss of $3.6 million, or 1¢ per share, in 2013. Other highlights from 2014 include a 29%, or 174,500 oz., increase in overall reserves at Timmins West and Bell Creek, after depletion. Combined reserves at the two mines now stand at 773,300 oz. gold from 5.5 million tonnes grading 4.4 grams gold. On the exploration front, the firm made a new discovery with its 144 Gap zone last October. The zone is located immediately southwest of the Thunder Creek deposit, one of the two deposits on the Timmins West mine. “We think it is among the most exciting discoveries in our industry today,” Lake Shore CEO Tony Makuch said on a conference call. So far, the firm has defined the 144 Gap zone to a minimum of 350 metres along strike and 350 metres down dip. For this year, it has budgeted $18 million to drill 120,000 metres on the zone, with a first resource estimate expected out in early 2016. The momentum the company gained in 2014 is continuing into this year. “We are having a very good first quarter of 2015. Production and grades are tracking positively. Costs are beating targets. We are generating solid free cash flow,” Makuch said. The company’s current cash and bullion position has grown to $75 million. It expects that to reach $100 million by year-end. This year’s production guidance is 170,000 to 180,000 oz. gold, at all-in sustaining costs of US$950 to US$1,000 per oz. The flat year-over-year guidance is mainly due to a slightly lower planned grade of 4.4 grams per tonne, compared to the budgeted 4.7 grams last year, which actually came in at 4.8 grams, Smith notes. While remaining bullish on the stock, with a “buy” and $1.30 price target, the analyst notes the most significant risk related to Lake Shore is its debt. The firm intends to repay the remaining $3.5 million of its senior secured debt by the end of May, but still has $103.5 million in convertible debentures, due September 2017. If Lake Shore runs into problems funding that in a low gold-price environment, it may need to raise additional equity, Smith cautions. Lake Shore ended March 26 off nearly 2% at $1.08 per share, with a market cap of $470 million.