Where Will Gold Go Next Following Fed Minutes Knock-Down

Frank Holmes of U.S. Global Investors weekly SWOT analysis

Strengths

  • The best performing precious metal for the week was gold, down 1.60 percent. Bloomberg reports that the “great gold rush of 2016 is gathering pace,” as holdings in exchange-traded funds have now surged 25 percent. Over the past two weeks, even as prices lost around 1.61 percent, ETFs swelled 63.2 tons and are rising every day, continues the article.
  • ICBC Standard, China’s biggest bank, has agreed to buy one of Europe’s largest gold vaults from Barclays Plc., reports Bloomberg. Just last week the bank won classification as a market maker by the London Bullion Market Association. “This enables us to better execute on our strategy to become one of the largest Chinese banks in the precious metals market,” Mark Buncombe, head of commodities at ICBC, said.
  • Ken Hoffman, senior metals analyst at Bloomberg Intelligence, said at a BI forum in London this week that more hedge fund managers “are seeing gold as a currency,” reports Bloomberg. Hoffman continued that those who are worried about central banks’ consequences “think of gold as the alternative.” Investec Wealth agrees – the group favors gold over bonds, mainly to hedge against U.S. political risk, continues Bloomberg.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 5.86 percent. A news story from the prior week highlighted that electric vehicles could have a large impact on reduced demand from platinum group metals. Norilsk Nickel, Russia’s largest palladium producer, commented that it has begun buying palladium in the market, via its Global Palladium Fund, in a move the company claims could reduce its volatility. Norilsk noted it will look to invest as much as $200 million to the fund for purchases of palladium.
  • This week the Federal Reserve pointed to a possible interest rate hike in June, sending gold to a three-week low. Gold fell 1.6 percent on Wednesday, reports Bloomberg, as the dollar strengthened. In addition, gold traders and analysts turned bearish for the first week in five weeks following the Fed’s April meeting minutes. Bloomberg reports that this ended the longest run of predicting stable or higher prices since mid-February.
  • India’s gold monetization scheme has been met with little success, reports the Financial Express. The government has tweaked a number of the scheme’s parameters in response, with hopes of bettering the public’s reaction moving forward.

Opportunities

  • In BCA’s weekly report, the research group writes “Investors are making a huge mistake in thinking that central banks are out of bullets…helicopter money is coming.” They go on to explain that once deployed, this policy will be more successful than people imagine.
  • As you can see in the chart below, BCA points out that “many people forget the Federal Reserve suppressed interest rates during WWII and the years that followed, leading to a 70 percent increase in the level of consumer prices between 1939 and 1948.” This led to significant erosion in real debt levels. BCA notes that banks have already moved very close to adopting helicopter money policies. The only difference between helicopter money and QE (quantitative easing) is that the latter entails a temporary increase in bank reserves, while the former entails a permanent increase

aswot

  • In its Precious Metals Outlook, TD Securities reviews year-end reserve updates, pointing out a 9 percent year-over-year decline in 2015 gold reserve ounces for large/mid-cap producers. Although this marks the fourth straight year of declining reserves, the group points out that this should drive a renewed focus on exploration and acquisitions within this space.
  • UBS raised its short-term gold outlook following the Fed outlook, reports Bloomberg. According to a report received Monday, UBS’s outlook increased to $1,150 – $1,350 an ounce, from a previous outlook of $1,100 – $1,310 an ounce. Ole Hansen of Saxo Bank believes that risks from the U.K.’s Brexit vote next month could also move the precious metal higher. Hansen predicts bullion could jump to $1,400 an ounce this year.

Threats

  • After holding on to a bullish view of stocks, Goldman Sachs has changed its mind and is warning investors of a “large drop” in the market, writes ZeroHedge. Goldman strategist David Kostin told CNBC on Thursday that based on the threat of margin collapse and record-high stock valuations this year, it’s time to play defense in a tough market, the article continues
  • Although Canadian raw materials stocks (companies including gold, copper, lumber and fertilizer producers) are having their best start to the year in roughly three decades, reports Bloomberg, some say this rally is missing a fundamental underpinning – economic growth. “I’ve got three words for you: Dead. Cat. Bounce,” David Rosenberg of Gluskin Sheff said. “There is no fundamental, long-lasting recovery in the commodity space without global demand growth shifting course and accelerating,” he continued
  • Millions of U.S. workers will soon become eligible for overtime pay under a new rule issued by the Obama administration on Wednesday. According to an AP wire story on the matter, the annual salary threshold at which companies can deny overtime pay will double from $23,660 to $47,500. “With the stroke of a pen, the Labor Department is demoting millions of workers,” David French, senior VP for the National Retail Federation said. “Most of the people impacted by this change will not see any additional pay.”
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