Gold holding its ground: Frank Holmes’ SWOT analysis for last week

Strengths

  • The best performing precious metal for the week was spot gold, up 0.84 percent. Gold held its ground, despite a second half of the week surge in the broader equity markets.
  • Gold climbed higher as the week progressed on the back of global market turmoil spurring demand for the safe haven asset, reports Bloomberg. Weaker-than-expected Chinese economic data in December added to market uncertainty, with Citigroup even raising its forecast for gold prices in 2016.
  • Data released from the Russian central bank on Thursday implies that the country added around 208 metric tonnes to its official gold reserves in 2015. This number is 21 percent higher than the 186.6 metric tonnes reported in 2014, according to a Platts news article this week.

Weaknesses

  • The worst performing precious metal for the week was platinum, still up 0.21 percent, but likely weaker due to the slack Chinese data that set the tone for trading action.
  • Greece’s top administrative court announced the annulment of the government’s decision in 2015 to revoke Eldorado Gold’s mining license. Although this news is positive for Eldorado, the root of the issue still exists. It seems the real problem here is the Greek’s belief that they own the land where the mining project is planned, along with all the gold in it, and they don’t seem keen on letting a private company exploit the state’s assets.
  • A prolonged gold slump has forced Barrick Gold Corp. to revise its price assumptions for 2016, Bloomberg reports. The company announced it may book as much as $3 billion in impairment charges, though this should come as no surprise during a challenging commodity market. In contrast to this news, Barrick became Canada’s most valuable gold miner last week for the first time in 19 months, and taking the mantle from Goldcorp as their largest gold company by market capitalization.

Opportunities

  • As a supply crunch takes hold this year, we could see the price of gold rise substantially. Thomson Reuters reports that global gold production is expected to fall 3 percent in 2016. This would end a seven-year streak of rising gold supplies (which peaked in 2015 at 3,155 tonnes), according to a Business Insider article.
  • Citigroup has raised their gold price forecast to $1,070 per ounce for 2016, up 7.5 percent, according to a January 19 report from the group. Citi analysts cite “ongoing global macro concerns” lending support this quarter, along with a “modestly more benign U.S. dollar outlook.”
  • Canadian gold companies (that have labor costs in Canadian dollars and revenue in U.S. dollars) should profit from the rising U.S. dollar, according to a Bloomberg interview with 1832 Asset Management’s Robert Cohen. Canadian-based gold companies like Claude Resources, Richmont and Agnico Eagle are performing well during this gold bear market.

Threats

  • Last year marked the fifth consecutive year of negative returns and underperformance for gold stocks versus the S&P, reports Goldman Sachs. Gold miners (GDX) were down 25 percent in 2015. Goldman doesn’t expect any positive catalysts for gold over the next 12 months, but says one key indicator will be the Federal Reserve’s pace of future rate hikes.
  • Wal-Mart finished 2015 down 30 percent, yet another sign of U.S. economy weakness. The store recently announced 269 store closures, with at least 10,000 employees being laid off. ZeroHedge uses Wal-Mart’s woes as evidence of the U.S. being “at the center of the global economic meltdown” – this might be a good time to own gold.
  • Price action in the North American gold stocks lagged behind the performance of bullion most of the past week.  It was as if someone was forced to exit their gold equity exposure (or a large player was overcome with frustration and told the street to just get them out of their position now), as gold stocks started the year strong but are now losing momentum.  Sales desk noted that Canadian generalists were seeing a pickup in shareholder redemptions.

Frank Holes is CEO and Chief Investment Officer for U.S. Global Investors

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