Record Q1 gold demand tempered by roll-over threat. The Holmes Gold SWOT

Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors  gives us his weekly analysis of last week’s reported Strengths, Weaknesses, Opportunities and Threats for gold and gold stock investment

Strengths

  • The best performing precious metal this week was silver, down 1.82 percent.
  • According to data from the Commerce Department on Thursday, orders for U.S. capital goods declined unexpectedly in April for a third straight month, reports Bloomberg. With American manufacturers continuing to pull back, this could indicate a lesser chance for the Federal Reserve to raise rates in June.
  • This week the World Gold Council reported that in the first quarter of 2016 global demand for gold was 1,290 tons – the highest ever for a first quarter – as investors seek safe haven investments in a time of economic fragility and uncertainty caused by negative interest rates, reports China Daily. The article continues by pointing out that buying U.S. Treasuries or other sovereign debt from Western countries has also become a “less attractive option for central banks because of their low yields.”
  • The global manufacturing purchasing managers’ index (PMI) is on track to decline in May, reports Cornerstone Macro. The research group believes this is a likely outcome given declines in the May Japanese and eurozone manufacturing PMIs, as well as a probable decline in the U.S. manufacturing PMI. Cornerstone points out a handful of important global tailwinds in its report including low interest rates and healthy U.S. growth, but says there are even more headwinds that include a China slowdown, excess emerging market debt and a Brexit risk, to name a few

Weaknesses

  • The worst performing precious metal for the week was platinum, down 4.40 percent.
  • Gold traders are bearish for a second week – the first successive week since mid-April – as bets increase on an interest rate move from the Fed, reports Bloomberg. The Fed Funds futures show the odds of a rate increase by July seen at 52 percent, up from 48 percent at the end of last week.
  • Following a pause in the dollar’s rally this week, Bloomberg reports that gold snapped six days of losses, rebounding from the lowest level in seven weeks. The article continues, stating that gold is still headed for the biggest monthly drop since November on speculation the U.S. Federal Reserve will increase U.S. borrowing costs as early as next month, denting demand for bullion.
  • As Venezuela’s economic crisis deepens and the government faces concerns that it could struggle to honor bond payments, the country held the biggest gold sale by a central bank in eight years, reports Bloomberg. According to data from the International Monetary Fund, Venezuela cut its gold reserves by 16 percent in the first quarter, following a 24 percent reduction in 2015.

Opportunities

  • The Fed may be bluffing on a rate hike, according to Mark Matthews, Head of Investment Research at Julius Baer Group. In an interview with the Economic Times, Matthews discusses the Fed’s history of contradicting itself, most recently on its stance back in February and March. “I think they did not like the fact that the market was not pricing in any rate hikes this year,” Matthews said. “They wanted to have some implicit threat of a rate hike in the market and they have largely achieved that now.”
  • Analysts at RBC Economics have come out stating that despite the “surprisingly hawkish” minutes from the Fed, raising rates in June is “nearly impossible.” In a report released Tuesday by RBC, the group stated “We think a lot of things have to align in order for the Fed to justify a lift at the July confab. September is still complicated by Money Market reform, and November falls right on top of the U.S. presidential election.”
  • Deutsche Bank, in a recent note, says that by preparing markets for future interest rate hikes, the Federal Reserve potentially hampers its ability to actually carry out those hikes in the future, reports Business Insider. The article continues by stating, that said in another way, “The Fed appears stuck in a negative feedback loop wherein suggestions that higher rates are coming create the unsettled conditions that ultimately force the Fed to keep rates right where they are.

Threats

  • UBS believes that gold is set to “roll over,” reports Bloomberg, forecasting bullion to drop back to $1,150 an ounce. The yellow metal could tumble as the U.S. dollar “erodes demand with the Federal Reserve opting for not one, but two rate increases before the year-end,” according to UBS Group AG’s wealth-management unit. Not everyone sees a retreat in gold however. Citigroup raised its year-end target by $100 to $1,250 an ounce, reports Bloomberg.

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  • In an interview with CNBC this week, Dennis Gartman cautioned investors on when he believes they should come off the sidelines for gold. He says the time to be bullish on gold is not until after the first interest rate hike of the year. Assuming that a rate increase will happen in 2016, he thinks investors should avoid the precious metal in the near term, as he expects an active market to remain after the central bank acts, reports CNBC.
  • Retailers in Hong Kong are forecast to see the worst downturn in gold sales in at least 15 years, reports Bloomberg. Fewer mainland shoppers are spending less money on jewelry, the article continues, and China’s economic slowdown and anti-corruption campaigns have hurt luxury retailers in Hong Kong with visits by Chinese tourists.
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