Hedge funds jumping back into gold

Frank Holmes’ SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis of what’s driving the markets over the past week


  • The best performing precious metal for the week was palladium, up 6.17 percent. Consumer demand is rising for gasoline- versus diesel-engine powered vehicles, yet automobile sales have started to relax in recent months.  According to Bloomberg, gold bulls outnumber gold bears this week as Trump probes are boosting safe-haven demand for the yellow metal. In fact, gold advanced to the highest level in nearly a month as Trump’s administration “grapples with revelations of mounting scrutiny into son-in-law Jared Kushner’s outreach to Russian officials,” Bloomberg continues. In related news, Fed’s Brainard says that soft inflation data may warrant a rethink on interest rates. Inflation in the Euro-area slowed more than economists forecast.
  • The Indian rupee posted its first monthly loss since November, reports Bloomberg. The positive side of this is the decline came amid increasing demand for dollars to pay for imports of items such as gold. The Perth Mint reported its gold coin and minted bar sales for the month of May, coming in at 29, 679 ounces. This is compared with April’s sales of 10,490 ounces.
  • Data from the Commodity Futures Trading Commission shows that money managers boosted their long positions in U.S. gold futures by the most in almost a decade in the week ending May 23, reports Bloomberg. As you can see in the chart below, hedge funds are jumping back into the yellow metal.


  • Platinum bore the brunt of the palladium move this week with a loss of 0.61 percent.  Shares of junior gold miners headed for the longest stretch of monthly losses in more than two years, reports Bloomberg, citing investor concern that “flagging momentum in this year’s bullion rally will dent the outlook for profits.” A Bloomberg gauge of 72 junior miners has lost 15 percent since the end of January and the rebalance of the VanEck Vectors Junior Gold Miner ETF (GDXJ) is also having a depressing effect on many gold names. Despite gold gaining 9 percent this year with a drop in the dollar, junior gold miners have not followed through with those gains as the GDXJ is set to cut in half its exposure to the junior mining space on June 16.
  • “Inflation has been below target for five years and has moved up only slowly toward 2 percent, which argues for continued patience,” said Fed Governor Jerome Powell in a statement this week. Powell is calling for gradual interest rate increases and a start to balance-sheet reductions later this year if the economy stays on track, reports Bloomberg, though he is keeping an eye on a recent slowdown in inflation. Based on prices in federal funds futures contracts, investors see the probability of a rate hike at around 85 percent when the FOMC meets June 13-14, the article continues.
  • Asanko Gold is set to release an expanded Mine Feasibility Report in response to a Muddy Waters short report that detailed negative assertions regarding the company and its operations, reports Bloomberg. Asanko said in a statement that there is no merit to the Muddy Waters report, while detailing that it maintains production guidance of 230,000 to 240,000 ounces for 2017. Asanko also said it sees no impact on production or safety resulting from a partial failure on the western wall of the Nkran pit, nor does it see a need for a $115 million pushback expense (as speculated by Muddy Waters).  The short report was likely timed to force Asanko’s market capitalization below the lower threshold limit for staying in the GDX index, thus triggering an additional 10.6 million shares to be sold.


  • Friday’s jobs report came in lower by 4.3 percent, and although the three-month moving average of 121,000 net new jobs is positive, the pace has slowed dramatically, writes Bloomberg. And if the Fed continues to raise rates, it will slow even further. Economists have three major risks they are worried about, according to the article: 1) slumping U.S. auto sales, 2) weaker Chinese manufacturing and 3) the potential for U.S. fiscal policy disappointment. “Anticipating a rate-hike endgame or more increases in rising inflation, gold is poised to continue to perform well,” explains another Bloomberg article. “In the current tightening cycle, spot gold and the S&P 500 Index are neck and neck, up 19 percent to June 1.”
  • In a research update from Industrial Alliance Securities, the group summarizes production statistics released by Rye Patch Gold from its Florida Canyon heap leach operation for May. Rye Patch reported 3,094 ounces of gold poured during May, up from 485 ounces in April. The mine is well on its way to achieving operating financial breakeven, the report continues. Rye Patch notes that heap leach operations tend to perform better in warmer temperatures (so notable production acceleration during the Nevada summer would not be a surprise) as well as the company’s extra cash in hand to fund further exploration. Similarly, Richmont Mines reported strong results from the Island Gold Mine Expansion Case Preliminary Assessment. It confirmed an increase in underground mine and mill productivity to 1,100 tonnes per day, supporting growth of 22 percent over an eight-year period, reports Bloomberg.
  • More company-specific news comes from Lundin Gold this week, which announced a $400-$450 million project financing package for Fruta Del Norte in Ecuador. The package comes with support from Orion Mine Finance and Blackstone Tactical Opportunities. Another announcement comes from AuRico Metals, noting a positive Preliminary Economic Assessment for the Kemess East Gold-Copper Project. Pre-production capital costs are C$327 million, reports Bloomberg.


  • As Jared Kushner, Donald Trump’s son-in-law and most trusted adviser, is sucked into an FBI probe, the President’s goals are increasingly at risk, reports Bloomberg. The probe could undermine policy priorities and hinder behind-the-scene communications with business leaders and foreign governments. “Kushner tried to establish a secret back channel between the president-elect and Kremlin after Trump’s election, and is reported to have held multiple undisclosed meetings with Russian officials during the campaign and transition,” the article states.
  • The AOMA Argentine union has threatened to restart a strike at Barrick Gold’s Veladero gold operation in the country next month if talks with management fail to resolve a contractual feud, reports Bloomberg. Barrick and the AOMA union were set for a third round of talks late Monday, with the dispute over contracts for outsourced workers being about three-quarters of the way resolved, said AOMA Secretary General Hector Oscar Laplace.
  • According to Wood Mackenzie, deep-water drilling costs are coming down as producers streamline operations and prioritize drilling in core wells. This means that oil at $50 per barrel could sustain some deep-water projects by 2018, reports Bloomberg. The tumbling costs present a challenge for the Organization of Petroleum Exporting Countries (OPEC), which is currently curbing output to shrink a glut, the article continues. Falling energy prices could dampen inflation expectations and be a headwind to gold prices.

Frank Holmes is CEO and Chief Investment Officer for US Global Investors


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