The Holmes Gold SWOT: Safe haven assets being sought out

Frank Holmes of US Global Investors latest Gold SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis for last week

Strengths

  • Gold opened the year with very a strong gain, climbing 4.02 percent, as rising sectarian tension between Saudi Arabia and Iran ratcheted up; North Korea announced the testing of its first hydrogen bomb; and twice on separate trading days, Chinese markets fell 7 percent, the maximum amount Chinese authorities allowed them to decline.  This sent shock waves through financial markets leading investors to seek out safe haven assets once again. In 2015 gold fell 10 percent, putting in three consecutive years of negative returns, its longest losing streak since 2000. Billionaire George Soros reiterated the precious metals’ status on Thursday by stating, “Global markets are facing a crisis and investors need to be very cautious.”
  • This week ZeroHedge pointed out a move in gold that many sell-side experts previously warned would never be able to happen again. On Thursday the publication shared a chart showing the precious metal finally broke out above the $1,100 resistance level, an encouraging sign going against a deluge of predictions calling for nothing but lower gold prices.
  • U.S. imports of gold jewelry rose to a seven-year high in October of last year, while platinum jewelry surged by more than 60 percent after precious metals prices dropped to multi-year lows, according to calculations from Thomson Reuters.

Weaknesses

  • The worst performing precious metal for the week was palladium, falling 12.11 percent, likely on weak manufacturing data out of China and its prospects for car sales to grow at a slower rate.
  • In Paradigm Capital’s 2016 Gold Sector Outlook, the group reviews 2015 share price performance by tiers – developers, seniors, and royalty companies.  They noted the “biggest surprise” came from the royalty companies. The report states that royalties didn’t have the best 2015, going on to explain that the recent poor performance has only happened during three out of the last 12 years. 
  • Top gold forecaster Bernard Dahdah, of French investment and bullion bank Natixis, predicts that the yellow metal will drop through $1,000 per ounce in the first three months of 2016, according to an article on BullionVault. He states the move will primarily be driven by the “expected path of interest rate hikes” from the Federal Reserve, and even believes the price could gradually decline to end 2016 at $950 per ounce.

Opportunities

  • According to HSBC’s analysis of the Federal Open Market Committee’s (FOMC’s) minutes, the median Fed projections show total PCE inflation and core PCE inflation expected to rise to 1.6 percent by the end of the year. The FOMC inflation target is at 2 percent, as seen in the chart below. The Globe and Mail outlines four specific investment regimes defined by growth and inflation: 1) In high growth and high inflation, real estate and resources do best, 2) In high growth and low inflation, growth stocks outperform, 3) In low growth and low inflation bonds shine, and 4) In low growth and high inflation most stocks underperform, but gold does best!  With so many central banks targeting higher inflation, to deflate their debts, be careful what you ask for.swot3
  • Looking back on their 2015 strategy, UBS says last year’s rise in volatility was just the beginning of a dramatic rise in cross-asset volatility. In the group’s macro-view this week, UBS stated that the large cap-driven U.S. indices, as well as Japan and European small and mid-caps, are “the last men standing” at 2015’s close. In 2016 UBS expects these markets to top out also, falling into a full-size bear market which, worst-case-scenario, would last into early 2017. UBS noted with equities predicted to roll over, investors should consider owning gold for better diversification.
  • Over the past two years, nearly 50 percent of global gold demand has come from Chinese and Indian markets – with particular buying strength on dips in the renminbi or the rupee, according to RBC Capital Markets. The group continues to look to increasing global market volatility to allow gold to regain its safe haven status. In addition, lack of exploration and capital investment spending should lead to a reduced supply.

Threats

  • This year began with a rocky start, points out BMO Private Bank, as Chinese policymakers struggled to stabilize the Shanghai Composite after disappointing manufacturing data showed economic contraction in China. According the BMO’s current market update, as we move further into 2016 “investors increasingly believe that central bank ‘puts’,” are not as effective as they once were.
  • ZeroHedge points out that 2016 marks a presidential election year (which usually have a bullish track record), but also marks the eighth year of president Obama’s term. A closer look at this cycle shows a divergence between a normal election year and the eighth year of a term – since 1920 (more or less) all eighth years of a term were amongst the worst for market performance.
  • Julien Garran of MacroStrategy Partnership believes that deteriorating private debt conditions, tightening liquidity, declining returns and slowing growth have now entered a “self-reinforcing cycle in the U.S.” As credit and returns deteriorate, Garran says corporates will no longer be able to justify gearing up to do buybacks. In 2013, 60 percent of Garran’s sample could justify buybacks, and now only 35 percent make the grade.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s