Is the Bear Market in Gold Over?  Some say yes – others not so certain

*Frank Holmes’ weekly SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of last weeks events in the gold market.

Strengths

  • The best performing precious metal for the week was platinum, up 0.94 percent. This is the second week platinum has led the precious metals group, with gold coming in as the second-best performer, up 0.46 percent.  In Zimbabwe which has significant platinum group metal mines, a deadline for all firms to transfer most of their shares to black Zimbabweans has passed with the close of the quarter, but it is not clear how many companies have complied.
  • Gold is had its best quarterly rally in 30 years, reports Bloomberg, as demand for haven assets continue to surge. The precious metal got a boost following Janet Yellen’s remarks this week stating that the Federal Reserve will proceed “cautiously” with rate hikes this year. Gold investors have also poured money into gold ETFs at the fastest pace since 2009, with negative rates in Europe boosting its appeal as seen in the chart below.

SWOT1

  • In February, China’s imports of gold from Hong Kong increased from the smallest level since 2011, reports Bloomberg. The Perth Mint also reported strong data this week, with minted bar sales coming in at 47,948 ounces for March compared with 37,063 ounces in February.

Weaknesses

  • The worst performing precious metal for the week was palladium, down -1.32 percent. In February palladium prices dipped 1.1 percent to around $495 an ounce.
  • Data from the Commodity Futures Trading Commission this week shows investors increased net long positions on the COMEX for the third consecutive week, pushing it to the highest since February 2015. Precious Metals Weekly writes that this positioning could limit the upside momentum in the near-term, however the net positioning has considerable room to increase and reach 2010/2011 peaks.
  • Gold wiped out March’s gains on the back of a strengthening U.S. labor market. ADP Research Institute reported 200,000 workers brought on in March, while the Labor Department reported Friday that payrolls grew by 215,000 workers. Demand for the precious metal could also fall in the March quarter, according to Reuters Mumbai. Higher prices along with a jeweler strike in India that has been continuing in several parts of the country for its thirtieth day, curbed sales in the world’s second-biggest consumer.

Opportunities

  • Research firm Metals Focus says that the bear market in gold is over, and sees the metal rallying to $1,350 an ounce. The group believes a changing investor sentiment in the first quarter will solidify the melt away in months ahead. “Confidence in central banks has been shaken and there are mounting concerns towards the increasing number of negative policy rates around the world,” the company stated Thursday.
  • The world’s largest asset manager, BlackRock, and PIMCO are both recommending inflation-linked bonds and gold, according to ZeroHedge, warning that costs are poised to pick up and there is a growing risk of inflation. BlackRock believes stabilizing oil prices and a tighter labor market could be contributors. BCA Research also pointed out this week the gap between consumers’ realized and expected inflation. A divergence here could mean a wave of investors will flock to gold when and if their expectations are not in line with the realized data which show core inflation rising over the last two month.
  • Calibre Mining Corp. and Centerra Gold released results this week from their La Luz Gold Project in Nicaragua – drill results show 53.7 meters grading 10.47 grams per ton. In the announcement, President and CEO Greg Smith stated, “This new high-grade intercept at Cerro Aeropuerto together with the previously released intercept of 71.05 meters grading 2.89 g/t highlights the potential for additional discoveries within the historic portion of the La Luz Project.”  Nicaragua is significantly underexplored but Calibre has been one of the early movers in that country.

Threats

  • Jeffrey Christian, managing partner at CPM, stated in an interview that he believes bullion will drop more than 7 percent to $1,130 an ounce by September, according to Bloomberg. His outlook, which is in-line with Goldman Sachs, looks at a strengthening U.S. economy (which could cause investors to re-evaluate their economic pessimism and their need for gold).
  • Gold Fields Mineral Services, a research unit of Thomson Reuters, stated in an email report this week that it thinks the gold rally will prove to be short lived and sees the metal dropping to under $1,200 an ounce. The statement went on to say, “Once current market turbulence starts to ease we are likely to see the price retreat again.”
  • Commodity prices could fall as investors rush for the exits, warns Barclays Plc. Bloomberg reports that the group sees commodities, including oil and copper, at a risk of steep declines as recent advances aren’t fully grounded in improving fundamentals.

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

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