A Closer Look at Gold Flows – The Holmes Gold SWOT

By Frank Holmes, CEO and Chief Investment Officer US Global Investors

Strengths

  • The best performing precious metal for the week was silver with a surge of 4.18 percent following the poor jobs report.
  • As seen in the chart below, when comparing the S&P 500 Index and Newmont Mining, the only gold mining stock in that index, on free cash flow per share growth, Newmont has performed significantly better. Both quarter-over-quarter and year-over-year, the mining company beats the broader index on this factor.

fhnewmont

  • The August unemployment report came in soft on Friday, with payroll expansion of 151,000, reports Bank of America. Consumer confidence surprised to the upside, while the ISM manufacturing index slipped to 49.4. In addition, the Department of Labor reported that second quarter productivity fell by 0.6 percent (the longest streak of declines in more than 35 years). As BofAML notes, when faced with a choice of defending the inflation target or allowing a modest overshoot, the Fed will choose the latter, meaning negative real rates could persist ahead.
  • The government in Burkino Faso wants to help mining companies that are already in operation in the nation to lengthen the lives of their mines, reports Bloomberg, and make it easier for new investors to get information about deposits. The supportive policies for wealth creation in the nation are strong. Not only are troops being deployed to secure the mines, but the government is also building seven solar power plants to help deal with an electricity shortage.

Weaknesses

  • The worst performing precious metal for the week was palladium with a loss of 1.85 percent. Russia’s state minerals depository noted they do not have any orders to buy platinum or palladium for inventories this year.
  • Gold is in its longest run of declines since May, reports Bloomberg, following speculation from leading central bankers that U.S. interest rates could rise as soon as September, lifting the dollar. “Gold’s rally this year has been pegged back as a rate hike is/was now on the cards,” the article continues. Metal for immediate delivery fell 2.2 percent this month and the momentum of bullion purchases for ETFs slowed.
  • During the three months through June, central banks cut their purchases by 40 percent compared to the same time last year, according to data compiled from the World Gold Council. This was the third-straight quarterly drop, reports Bloomberg, making it the longest streak in at least five years. In a similar mood toward the yellow metal, Citi analysts cut their six month stance to bearish, reversing their upgrade of the sector following the Brexit vote.

Opportunities

  • In RBC Capital Market’s The Morning Miner report, the group’s traders were noting that the last rate raise by the Fed was in December of 2015, and since then the GDX is up over 100 percent. When looking at spending for the miners, the report shows that a majority of companies have “sustaining capex below 50 percent of full-year guidance.” A Morgan Stanley report also highlighted capex intentions out of Australian companies, noting that fiscal year 2017 capex intentions provide better visibility on an expected -32 percent plunge in resource spend.
  • TD Securities released its Precious Metals Second Quarter Recap report this week, noting that overall the quarter was largely in-line with expectations. The group says margins were up slightly as the increase in gold price more than offset modest cost increases. In addition, production was relatively flat quarter-over-quarter, but remains down year-over-year. Lastly, positive free cash flow generation continued during the second quarter, with companies maintaining a tight lid on non-essential spending.
  • Despite gold and silver stocks being up over 100 percent in 2016, Sean Williams at Motley Fool says they can still be considered “value stocks,” particularly relative to the S&P 500. His analysis is based on price-to-cash flow per share ratio (P/CFPS). Currently, the S&P 500 is valued at 8.7 times P/CFPS (and generally speaking it is often between 10 and 20). “However, if you look at gold and silver stocks, you’ll find substantially cheaper alternatives on a price-to-cash flow per share basis,” Williams continues. “Especially after this last correction. In many instances, you can find mid-to-high, single-digit P/CFPS among gold and silver miners.”

Threats

  • Some of South Africa’s biggest mining companies are opposed to a government proposal that 1 percent of their annual revenue be spent on developing communities associated with their operations, reports Bloomberg. Some have countered with suggestions that they pay a share of profit instead. These companies already pay royalties to the government, differing by commodity. For example, gold producers pay around 3 percent of revenue, says Bloomberg.
  • James Rickards recently pointed out the risks of having all of your assets in a digital format versus owning some physical gold. Rickards notes whether that means digital currency deposits, digital gold, digital stocks, etc. According to the Zero Hedge article, Rickards believes these assets are now intermediated by technology which creates counter party risk from the platform, liquidity providers, etc.
  • Christopher Louney from RBC Capital Markets writes that the Chinese gold market will continue to grow, according to the group’s analysis on the space. However, he notes that lower net demand and continued supply growth means that the demand shortfall should narrow this year, thus “feeding the dragon” should be easier this year than in those past. The group also reiterates their belief that the gold price will weaken, noting the “investor-only” nature of this year’s gold rally while jewelry sales have stagnated.
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German Gold Reserve Repatriation, Gold ETF Accumulation, Bulls and Bears

The latest Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis for last week from Frank Holmes – CEO and Chief Investment Officer for U.S. Global Investors

Strengths

  • The best performing precious metal for the week was platinum, however still down -2.35 percent. Price action was driven by increased auto demand in the European Union, reports Market Realist, which rose 14 percent in February. Platinum and palladium is used in the production of catalytic converters.
  • Germany announced this week that it wants half of its gold reserves back by the year 2020, reports Bloomberg. Bundesbank, the country’s central bank (which has gold in London and New York), has repatriated 1,400 metric tons, or 41.5 percent, of Germany’s gold reserves to Frankfurt.
  • Even though gold prices haven’t done much this month, investors are still pouring cash into gold exchange-traded funds, reports Bloomberg. Gold ETF assets continue to increase, with holdings currently near a two-year high.

Weaknesses

  • The worst performing precious metal for the week was silver, down -3.96 percent. The precious metal plunged on Wednesday, and remains low today, mainly driven by a stronger U.S. dollar.
  • The U.S. dollar gained this week against all major peers, causing gold traders and analysts to turn bearish for the third time in four weeks, according to Bloomberg. The dollar was boosted on prospects for higher U.S. interest rates, in turn cutting the precious metal’s appeal as an alternative investment. This week gold headed for its biggest weekly slump since November.
  • As seen in the chart below, Bloomberg reports that the gold momentum gauge is flashing a bearish sign as the metal’s rally has started to fizzle. Head of metals research for Societe Generale, Robin Bhar, told Kitco News that the recent gold price rally looks unsustainable. Bhar cited financial turmoil and expectations that the U.S. and global economies will fall into recession have been the factors behind the move, reports Kitco, although these appear to be extreme scenarios.

SWOT Mar 30Opportunities

  • A prominent forecaster from JPMorgan Chase believes investors are better off betting on gold, explaining that the market’s rally is in trouble. An article on CNBC clarifies Marco Kolanovic’s view that the popular trade of being long momentum stocks against a short position on S&P 500 is being unwound. Kolanovic is widely followed by the hedge fund industry and concludes the rally in the broader market has been driven by short covering of bets that the market would fall, thus if stocks reverse, gold should be a beneficiary of the shift.
  • Reuters reports that the 19-day strike by Indian jewelers finally came to an end on Saturday, after government assured they will not be “harassed” by the excise department in collecting a new tax. The jewelers went on strike at the beginning of March following the reintroduction of a 1 percent excise duty on gold jewelry after four years.
  • Klondex Mines reported fourth quarter and year-end results after market close on Thursday.  The results were positive with costs coming in better than expectations and free cash flow higher than forecast.  Klondex forecasts a 16 percent increase in production for 2016, while most companies are flat-to-negative on growth.  Cash balances increased 30 percent for the year.  We expect further positive developments as we see 2016 progress.

Threats

  • A wholly-owned subsidiary of Kinross Gold Corp., Compania Minera Maricunga (CMM), was notified by Chile’s environmental regulatory authority of a resolution starting a legal process, according to a news release on March 21. The resolution will seek to require CMM to close the Maricunga mine’s water pumping wells located in the Pantanillo area of Region III due to drought. Kinross responded stating it is committed to responsible environmental management.
  • James Bullard, president of the Federal Reserve Bank of St. Louis, told policy makers this week that they should consider raising interest rates at their next meeting, reports Bloomberg, which would help boost the greenback. Gold has fallen to its lowest in a month as the dollar advance saps up demand in addition to some policy makers saying that recent economic data justifies tighter monetary policy.
  • Gold miners are letting the hedge grow, writes Peter Ker. The price of gold has neared record highs in Australian dollar terms, with the largest gold miner on the ASX deciding to embrace hedging. On Thursday, Newcrest Mining confirmed that a portion of the gold produced at the Telfer mine in Western Australia has been hedged until 2018.  This could signify that miners don’t believe the high gold prices can last.