The Holmes Gold SWOT: Gold Holds On as Investors Lose Faith in Central Banks

SWOT Analysis by Frank Holmes – CEO and Chief Investment Officer US Global Investors

Strengths

  • The best performing precious metal for the week was gold, down 0.77 percent. According to Kitco News, despite the precious metal’s four-week rally coming to an end this week, analysts still see volatile equity markets supporting the metal’s prices.
  • Gold’s rally is holding steady as investors are losing faith in central banks’ ability to deal with economic challenges, reports Bloomberg. “If they’re not going to put up U.S. rates as fast as the market had been anticipating, then that’s going to send the U.S. dollar lower, “ David Lennox from Fat Prophets in Sydney said. “That will be beneficial to the gold price.” Inflows into bullion-backed ETPs this year have also topped outflows in all of 2015, as seen in the chart below.

swot1

  • In combination with continued strong cash flow from operations, St. Barbara is anticipating it will pay out the Red Kite debt facility in full by the end of June,  12 months ahead of the amortization schedule. Other positive news comes from Argentina, where a national newspaper reported on Friday that the newly elected president, Mauricio Macri, repealed the export mining tax in the country.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 4.57 percent. This marks the second week for the metal’s poor performance among its peers, with platinum ending the week down 1.64 percent and silver down 2.46 percent.
  • Asian physical gold demand slowed this week, reports Reuters, with consumers opting to wait out the metal’s biggest rally in years. In India, discounts surged to a record high of $50 an ounce, widening from the $35 discount last week, dealers said. “When there’s volatility in gold, people tend to shy away from making a purchase,” Rajesh Khosla, managing director at MMTC-PAMP India, said.
  • In a statement on Thursday, Gold Fields announced that production will drop to 2.05 million ounces to 2.1 million ounces in 2016 (from 2.16 million last year), leaving the company reliant on its delayed South Deep operation. Gold Fields fell the most on record following the statement but has recovered much of the initial price weakness. According to Bloomberg, the outlook for Kinross Gold also looks a bit dim, after the company was cut to junk by Standard & Poor’s last week. Kinross is the latest mining company to join the “junk bin.”

Opportunities

  • ABN AMRO Group, a longtime gold bear, has changed its tune and sees the precious metal rising from $900 to $1,300 an ounce by year end, reports Bloomberg. “Our new scenario sees a longer period of weaker global growth,” Georgette Boele of ABN AMRO said. Credit Agricole analysts seem to be in agreeance; the bank projects gold will be at $1,250 an ounce in December, citing that the U.S. dollar is unlikely to generate the same upside momentum as in 2015.
  • According to Mad Money’s Jim Cramer and commodity strategist Carley Garner, gold prices aren’t in the depths of despair anymore. “I’ve always been a big believer that you should own a little gold,” Cramer said. A few fundamental changes from Garner include a more dovish Federal Reserve policy along with negative interest rates being a commonplace. In a note from UBS, the group states that even after Monday’s flurry of selling following last week’s risk-on theme, the urgency to liquidate has slowed substantially and buyers have started to emerge once again.
  • Nearly a quarter of the world economy is now experiencing negative rates and gold bulls are thriving in reaction, reports Bloomberg. As central banks around the world move toward new and untested strategies, such as negative rates or the prospect of widespread debt forgiveness, analyst Kenneth Hoffman says that gold is the natural beneficiary.

swot2

Threats

  • Goldman Sachs recommends shorting gold, according to a report released Monday, with a three-month target of $1,100 an ounce. Goldman believes that as China has been, and will likely continue to be, a net seller of U.S. treasuries, this will be negative for gold, reports Bloomberg.
  • A closer look at Goldman’s view on the precious metal shows that the bank still expects rates to rise, putting the odds of a U.S. recession at just 15 to 20 percent, also rejecting the notion that a re-run of the crisis was likely. “We believe that these new fears, like past fears, are not justified,” Goldman analysts wrote. “Systematic risks stemming from the collapse in oil and commodity prices are extremely small.”
  • Barrick Gold says it plans to cut its debt by another $2 billion in 2016, reports Bloomberg, seeking to shore up its balance sheet following three annual declines in the price of gold. The producer may sell additional non-core assets and create new joint ventures and partnerships.  Potential investors should also be aware that Barrick’s share price has surged this year and there is higher likelihood that an equity raise could be part of the plans to pay down debt, much like it did in 2013.
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