Can the recent gold rally be sustained – The Holmes gold SWOT

 

Frank Holmes’ latest Strengths, Weaknesses,Opportunities, Threats analysis from last week’s media reports

Strengths

  • It was somewhat of a subdued week for metal prices following the gains of the prior week.   The best performing precious metal for the week was platinum, up just 0.32 percent on little impactful news.
  • Gold rallied above $1,300 an ounce earlier in the week, reports Bloomberg, the first time since January 2015, on speculation that central banks in the U.S. and Europe will maintain low interest rates. Gold continued to shine even when speculators took a step back. According to Bloomberg, hedge funds missed the party, reducing their wages on a rally by the most since turning bullish in January.
  • With gold prices rising the most in 15 months, demand for American Eagle gold coins has strengthened, reports Bloomberg. Sales totaled 351,000 ounces this year, which is double the 175,500 in the first four months of 2015. A similar situation at the Austrian Mint saw sales of gold bars and bullion coins up 45 percent in 2016 over the previous year’s total, reports CoinWeek.

Weaknesses

  • The worst performing precious metal for the week was palladium, off 2.39 percent.   Bloomberg ran a story trying to highlight that “oil isn’t the only commodity threatened by Tesla’s rise”  as they zero in on the woes of platinum demand for electric cars – oops, perhaps the author meant to be talking about palladium as this is the primary platinum group metal used to treat the exhaust gases of gasoline powered cars.  Platinum’s use is higher in diesel engines though.
  • According to Bloomberg, India’s government has collected 2.8 tonnes by 105 depositors of gold so far under its Gold Monetization Scheme (GMS). The scheme, which has been in place for six months, is intended to mobilize idle gold held by households and institutions of India to facilitate its use for productive purposes, reports Bloomberg.
  • Canaccord analysts led by Tony Lesiak wrote this week that the gold sector is reaching fair value, explaining that additional gold price strength is needed for further material performance in equities. Alamos Gold, Barrick and Kinross were cut to hold versus buy by the analysts, reports Bloomberg. In other gold company news, Newcrest announced the completion of additional hedging of a portion of Telfer’s expected fiscal year ’18 and ’19 gold sales (with further 200,000 ounces of gold sales being hedged at an average AUD gold price of A$1,773 an ounce), reports Bloomberg.

Opportunities

  • On Tuesday, gold open interest (a tally of outstanding contracts in Comex futures) rose 3.1 percent to 565,774. This is the highest since January 2011, reports Bloomberg, and could mean the precious metal’s rally may persist. After being shunned for nearly three years, gold is making a powerful comeback.

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  • According to Randgold’s CEO Mark Bristow, the gold industry needs to invest in exploration, reports Bloomberg. This is indeed one of the best ways to create value in the long run. It is true however, that many companies have cut exploration budgets and may scramble to buy smaller companies. Speaking of exploration, Scotiabank reported on Klondex Mines this week, noting the company’s exploration results from its Fire Creek mine in Nevada (where the latest drilling extended the Karen, Joyce and Hui Wu veins along strike by up to 430 feet as well as down dip by up to 125 feet). “We note that a two-year extension in the mine lives of both Fire Creek and Midas would boost our NAV estimate,” continues the research note.  Brian Morris, Vice President Exploration Klondex, notes that the drill results support our belief that Fire Creek is a much larger system than we know today.
  • Billionaire investor Stan Druckenmiller is loading up on gold, reports Bloomberg. At the Sohn Investment Conference in New York on Wednesday, he said the bull market in stocks has “exhausted itself” due to excessive borrowing from the future, adding that gold is his largest currency allocation. “We refer to gold as a currency, not a metal,” Druckenmiller said. Hedge fund manager David Einhorn agrees that gold is poised to generate profits, reports Bloomberg, citing increasingly aggressive monetary policies for his view on gold prices.

Threats

  • Rising gold prices could smother Indian gold demand for a festival next week and weddings this month, reports Bloomberg. The world’s second-biggest user of the precious metal has seen a surge in local prices to the highest in two years, deterring normal seasonal buying patterns.
  • In a report from ICBC Standard Bank this week, the group notes: “Signals that the gold rally has gone too far, too quickly increased in number and intensity at the start of this week.” The report cites options, contract contango, U.S. dollar reversals, and a subdued Indian market. In fact, gold fell for a third day on Wednesday as the dollar rebounded on the possibility of a U.S. interest-rate increase in June, reports Bloomberg.
  • As we know, China recently introduced a new yuan priced gold fix. Within a week of the new fix being introduced however, Russia and China announced a new gold trading platform, reports Sputnik News. In a recent interview with Austrian Economist Sandeep Jaitly, Double Down asks him to explain the purpose of the fix and what the gold moves by Russia and China could tell us about the current fiat money system. Sandeep noted that with the demise of the London Gold Fix, which used to be set in pounds sterling and moved to only the dollar fix after World War II, has opened the door for the Chinese to be the price setter of physical gold.  Also, Sandeep explained that the gold fix price historically was for setting the price of a fiat currency relative to gold not the other way around as it commonly thought of today.  The trading platform the Chinese and Russians have adopted may eventually be a mechanism to set prices for goods or services in terms of gold and to break the dollar’s place as the currency of international trade.

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

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Number of Bearish SPDR Gold Shares Options Fall

Frank Holmes of US Global Investors‘ latest SWOT analysis for gold

Strengths

  • The best-performing precious metal this week was platinum, climbing 3.03 percent.  Absent any real market moving news, the lift was likely from short covering as platinum prices have been off as much as 30 percent this year.
  • After the losses seen in gold following the Federal Reserve’s rate hike last week, Bloomberg reports that some traders closed their bearish positions on the metal before year-end on speculation that physical purchases may pick up. Further, Bloomberg notes that the put-to-call ratio on SPDR Gold Shares has reached its lowest level since 2008, perhaps indicating that investors who were betting on further declines in gold prices are losing enthusiasm for this trade. Hedge funds reduced bets for a third week that the dollar would advance, according to Bloomberg. The currency is headed for its biggest monthly decline since April. According to Shane Oliver of AMP Capital Investors: “The bet is over for the U.S. dollar.”

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  • Finland’s foreign minister, Timo Soini, announced that his country should never have joined the euro, according to a Brown Brothers Harriman report. Soini announced during a press conference that Finland could have weakened its currency had it not adopted the euro, adding that organizing a referendum on the currency means that the debate “will gather steam.”

Weaknesses

  • The worst-performing precious metal this week was palladium, recording just a 0.09 percent gain. Bloomberg noted that car sales in China, which rebounded in October due to a tax cut, have not led to any price strength in palladium.
  • Three months after announcing its interest in redeveloping a gold mine in Ghana, Randgold Resources has pulled out of the Obuasi plan. Following the completion of a due diligence exercise into the mine, the company decided not to go through with its planned joint venture with South African firm AngloGold Ashanti. Randgold determined that the development plan doesn’t satisfy its internal investment requirements.
  • Yamana Gold announced its decision to suspend the monetization of its Brio Gold subsidy, based on the context of current market conditions. In November, Yamana had announced it commenced a private placement of Brio common shares, according to a Canaccord Genuity report, which consisted of a primary offering by Brio and a secondary offering by Yamana. Cannacord’s valuation assessment of Yamana’s suspension reasons that “the lower multiple reflects the inability to conclude the monetization of Brio Gold.”

Opportunities

  • The mine supply issue is coming to a head, according to Credit Suisse’s 2015 Year-End Preview report. Reserve life has fallen from 14 to 10 years since 2011, and grades processed are 9 percent above reserve grade in 2015. The report continues by noting that gold is positioned to outperform the commodity complex next year as two more Fed hikes are priced in, physical demand should continue to be a source of strength and central banks will continue buying.
  • HSBC Research says there are two catalysts for gains in platinum in 2016, after touching seven-year lows: improved automobile and investment demand. Both platinum and palladium should benefit from limited supply growth and a weaker U.S. dollar, according to HSBC’s report, as ample stockpiles may curb rallies.
  • Both Scotiabank and Paradigm Capital released initiation reports this week for Klondex Mines, following the company’s announcement last week of its acquisition of the Rice Lake Mine near Bissett, Manitoba. Paradigm’s report calls Klondex a “Four G Winner,” highlighting grade, growth, geology and geopolitics, and concluding with a “buy rating” for the company. Scotia noted that investors can “Weather the Storm with This High-Grade Gold Producer” and went with a “Sector Outperform” rating.

Threats

  • In its analysis of the broad U.S. equity market this week, BCA Research explains that deflation now plagues more than half of the groups that they cover. An update on industry group pricing power shows that 32 out of 60 industries have had to cut selling prices, up from 26 in BCA’s last update.  To further illustrate the underperformance of the economy, BCA provided a chart that shows each successive real GDP forecast made in the Conference Board Budget Outlook from 2007 through 2015 compared to actual real GDP.

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  • According to Financial Post data, 2015 could go down as the biggest year ever for metal streaming deals, as miners have raised $4.2 billion from 11 stream sales this year. This is almost double the amount raised in 2013, $2.2 billion, which was the second biggest year on record. One argument surrounding the dark side of metal streaming deals is that streams can eliminate exploration upside from a mine. In addition, John Ing, president and gold analyst at Maison Placements Canada, believes streaming is reminiscent of hedging. (This was all the rage in the gold industry in the 1990s, but has since become a huge liability).
  • Bank of America Merrill Lynch released a report on the high-yield gold industry, starting with its overview of select high-yield gold credits: Eldorado Gold, IAMGOLD and New Gold. After its consideration regarding production, asset quality, credit and financial strength, along with relative value, BAML says it is “hard to get excited about any of the names we discussed.” The report continues by stating that, “given our BAML Commodity Team’s view of headwinds facing gold prices, we do not find a compelling reason to own any gold miners’ debt heading into 2016.”