Political Risk Building into the Gold Market? The Holmes SWOT

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

Strengths

  • The best performing precious metal for the week was palladium, up 5.49 percent.  Citigroup forecast that platinum could see a deficit of 172,000 ounces in 2016, but palladium’s deficit could be short by 847,000 ounces, thus the group is more bullish on the later.
  • Esturo Honda, who according to Bloomberg News has emerged as a matchmaker for Prime Minister Shinzo Abe in finding foreign economic experts to offer policy guidance, is opening his ears to Ben Bernanke.  In April, Bernanke noted that helicopter money, in which “the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them,” could work as the strongest tool to overcome deflation, says Honda.
  • Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, says there is political risk building into the gold market, including the Italian referendum and U.S., French and German elections. Blanch adds that in the past, gold used to be driven more by the U.S. dollar and commodity market movements, but “in this day and age, it’s a new world.” He also mentions that one-third of government bonds are yielding negative. The chart below shows that $9.2 trillion of sovereign bonds are trading with negative yields.

swot4
Weaknesses

  • The worst performing precious metal for the week was silver, down -2.97 percent.  With silver generally more volatile than gold, a strong rally in stocks, up 10 of the last 11 days and with new record highs, had investors chasing returns in the broader market.
  • Gold traders and analysts are bearish for the first time in four weeks, reports Bloomberg. The precious metal headed for its first back-to-back weekly decline since May, with gains in equity markets and the dollar hurting prices. David Meger, director of metals trading at High Ridge Futures in Chicago, says that the dollar’s strength continues to pressure most commodities, gold in particular. “Safe-haven demand has been diminishing, obviously with equity markets moving to new record highs,” Meger said.
  • A group of armed men stormed one of Agnico Eagle’s mines in northern Mexico early Tuesday morning, reports the Canadian mining company, injuring a security guard and making off with a haul of gold and silver. Last April a similar situation occurred when armed men entered McEwen Mining’s El Gallo 1 mine in northern Mexico, reports Reuters, even though thefts within mines are “relatively rare in Mexico.”

Opportunities

  • The World Gold Council and the Accounting and Auditing Organization for Islamic Financial Institutions are drafting new standards for investing in gold to comply with Sharia law, reports an Energy and Capital article. If the proposals for the changes (expected in the fourth quarter) are accepted, a flood of new investors could help send gold prices soaring, the article continues. A similar situation took gold prices to $1,900 in 2011 when surging demand came from China following the government’s urge for its citizens to own the yellow metal.
  • With the U.S. presidential election seen as the next big catalyst, Bill Beament of Northern Star Resources believes that gold’s rally is set to endure, reports Bloomberg. He says the overall trend is up and that “the U.S. vote will have more of an impact on bullion than the U.K. referendum.” The IMF also scrapped its forecast for a pickup in global growth, the article continues, yet another positive for gold.
  • Commerzbank raised its year-end gold estimate by $100, reports Bloomberg, to $1,450 an ounce. Similarly, DBS Group Holdings says that gold is in a major bull market and could surge past $1,500 an ounce as “low interest rates buoy demand and the U.S. presidential election looms.” The long-term gold price has been adjusted higher at Numis Securities as well, up to $1,400 an ounce from $1,350 an ounce.  While it’s good to see the street starting to take their price forecast higher for gold, investors should remain disciplined as the late summer can be a seasonally weak period for prices and many of the expected price targets being raised are capitulation moves to higher price levels.

Threats

  • According to data compiled by Bloomberg, investors pulled $793 million out of SPDR Gold Shares last week, the most since November. As Citigroup’s U.S. Economic Surprise Index rose to its highest since January 2015 (a sign of an improving economic outlook), demand for ETFs backed by gold has diminished some. Holdings in gold-backed ETFs around the world fell 3.9 metric tons last week, reports Bloomberg.
  • Sovereign gold bonds issued in India were trading at a 27-percent premium over the fixed price when the bonds were first issued in November, reports LiveMint. Prices of physical gold have risen 23 percent during the same period. According to the article, “Investors get a fixed interest rate of 2.75 percent per annum on these bonds over and above the capital gains that may accrue if the price of gold rises in the spot market.” The gold bonds are part of the government’s gold monetization efforts aimed to “wean the public off physical gold.”
  •  Will gold miners maintain their capital discipline? Bloomberg reports that as the price of gold rises to its best first half of the year in nearly four decades, earnings reports could indicate that miners are preparing to ease in terms of spending. “Historically there’s been a very high correlation, almost a one-to-one correlation, between costs and the gold price, implying that with higher gold prices you will likely see costs rise at the same time,” Josh Wolfson of Dundee Capital Markets said. Wolfson added that a majority of miners structured spending based on the assumption that gold will trade between $1,100 and $1,150 an ounce.  Let’s hope the miners learned something over the prior three painful years of falling gold prices.
Advertisements

Japanese selling yen to buy gold- The Holmes SWOT

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

Strengths

  • The best performing precious metal for the week was palladium, up 4.89 percent. Wage negotiations started this week in South Africa with opening demands including a 15 percent hike for the highest paid employees and a 47 percent hike for the lowest paid. With the threat of possible strikes in South Africa and a 19-percent rise in auto sales in China reported for June, related to tax cuts on auto purchases, we could see further upside in palladium prices.
  • “Gold is the unprintable currency, unlike the yen,” said Itsuo Toshima, former regional manager for the World Gold Council in Tokyo. According to Bloomberg News, Abenomics skeptics are selling the yen to buy this unprintable currency – gold. Individual investors drove a 60 percent jump in sales of the precious metal in June from May at Tanaka Holdings, the operator of Japan’s largest bullion retailer.

swot3

  • Tanaka Holdings announced this week its plan to buy Metalor Technologies International SA, a privately held Swiss precious metals refiner, reports Reuters, expanding into precious metals recovery and refinery in Europe, North America and Asia. The aim is to boost Tanaka’s business as local growth stagnates due to a falling population by expanding their presence in the supply chain. No terms were given yet in the statement.

Weaknesses

  • The worst performing precious metal for the week was gold with a loss of 2.11 percent. At the end of last week, the net long gold futures position on the COMEX had reached an all-time high, when we were in line for a possible correction. Interestingly, gold equities did not fall as much as the gold price over the past week.
  • Gold assets held in the world’s largest ETF backed by the metal, the SPDR Gold Shares fund, dropped the most in three years, reports Bloomberg. Holdings fell 16 metric tons to 965.22 metric tons on Tuesday as U.S. equity markets reached record highs. Following the U.K.’s decision to keep rates at 0.5 percent, gold dropped to a two-week low. The outlook for more central bank stimulus is curbing demand for the metal as a haven, notes Bloomberg, while a decline in demand from jewelers and retailers is also pushing the price lower.
  • Gold was also impacted by a strong U.S. jobs report against signs of risks to the global economy, reports Bloomberg. Payroll data exceeded analysts’ expectations, buoying stocks and other risky assets, the article continues. In related news, SoGen announced Monday that gold producers expanded the hedge book 1.6m ounces in the first quarter, and stood at delta-adjusted 8.7m ounces at March 31. The majority of net hedging in the first quarter came from Newcrest and Polyus Gold.

Opportunities

  • In its Global Gold Outlook this week, RBC Capital Markets increased its gold price assumption from $1,300 to $1,500 in 2017 and 2018, which is 12 percent above the current spot price. Citing one of the key gold price drivers, RBC notes that “a negative real rate of -1.0 percent suggests a $1,546 gold price.” Bank of America agrees that the yellow metal could move higher, stating that gold is headed to $1,500 an ounce, while also pointing out that silver can overshoot $30 an ounce. A combination of a weaker U.S. dollar and previously deferred demand from Asia should support the gold price in the second half of the year, according to a report from Citi analysts.
  • Jeff Gundlach of DoubleLine Capital discussed his investment portfolio with Barron’s this week, the composition of which ZeroHedge broke down as follows: “high-quality bonds, gold, and some cash.” In response to inquiries about what kind of portfolio is he running, Gundlach said the following: “I say it’s one that is outperforming everybody else’s…Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.”
  • Klondex Mines reported its preliminary quarterly production results this week of 41,436 ounces, according to a statement released by the company. This apparently beat expectations as the stock rose better than 1 percent this week while the averages were down almost 2 percent. Jaguar Mining also reported strong second quarter production this week of 24,222 ounces of gold, a 17 percent increase year-over-year. The company also cited high-grade gold mineralization recently encountered, confirming downward extension at depth at its Turmalina gold mine. Jaguar says the drill results provide potential to upgrade current inferred resources to higher category.

Threats

  • For the first time ever, Germany issued a 10-year bond at a negative interest on Wednesday, selling more than 4.0 billion euros with a yield of minus 0.05 percent, reports the Bundesbank. Negative interest rates in Japan are also present, and seem to be backfiring in a big way, reports Bloomberg. The article reads, “Instead of encouraging spending, people are stashing their cash in safes, with sales of house safes increasing 250 percent over the last year.” What’s even more troublesome, is many elderly Japanese people are purposely committing crimes to end up in prison – a place with free food and health care, since negative rates are eating up their savings.
  • In Brazil, bitcoin seems to be gaining more and more momentum, reports NewsBTC.com. The digital currency trading volumes in Brazil have actually surpassed that of gold in the last six months. “The recent rise in bitcoin prices from about $450 to over $700 before stabilizing at around $650 is attributed to increased demand in the Chinese market, Brexit and other external factors,” the article reads.
  • According to portfolio strategist Martin Roberge of Canaccord, gold could correct in the summer. Roberge noted that gold stocks have outperformed the broader S&P/TSX Composite Index by 71 percent this year, and while this does not mean the bull market is over, he believes this kind of run is usually followed by a “higher risk” phase.

H1 Zinc gains almost match Silver.  Oil and Gas strong too.

While this website primarily covers the precious metals we diverge on occasion into other commodities and in this respect our concentration on price gains in gold and silver in particular have meant we have missed the big recoveries in some other metal and mineral commodity sectors too.  Indeed it took Frank Holmes’ review, and his ‘periodic table’ of H1 commodity performance to show how well some of these have been performing almost as well as silver – still the H1 leader in price gains – over the first half of the year.  In actuality it is almost certainly a case of these commodities being heavily oversold in last year’s big downturns, but it is worth noting that invariably such downturns are overdone with momentum carrying prices down way below levels justified by the true supply/demand equation.

periodic
click to enlarge

The H1 ‘Periodic table’ shown above from U.S. Global Investors shows in no uncertain terms how volatile the sector can be over the years with the top and bottom performers switching around almost on an annual basis.  And what it shows for H1 2016 is that although silver was, as we have noted beforehand, the top performer to date with an H1 price rise of 35%, zinc put on nearly as much at 32%, with oil and gas (hugely oversold last year) knocking gold into only 5th place with respective gains of 30%, 25% and 24.5%.

Zinc does have additional relevance in a focus which is primarily on precious metals as most primary silver producers also mine zinc (and lead) in relatively large quantities as well with the three metals invariably occurring together.  So the rise in zinc prices will have had an additional booster effect on the fortunes of most of the primary silver producers.  Similarly most primary zinc mines will also be producing silver as a byproduct.

Indeed the supply/demand situation for zinc has caused many commodity analysts to tip zinc and zinc miners as having strong investment potential over the past few years, but until this year the metal has not performed as the analysts had predicted.

Their premise had been one on likely major disruptions in the supply/demand balance with two of the world’s biggest zinc mining operations coming to the ends of their profitable lives, and no major new producers coming on line to replace what was assumed would be a significant supply shortfall.  In retrospect the Chinese industrial downturn threw some of the demand parameters into disarray and last year, for instance, zinc was one of the worst performing commodities, falling in price over the year by around 26.5%.

As Holmes pointed out in his accompanying article – Silver Takes the Gold: Commodities Halftime Report 2016  – this dynamic certainly helped   boost the zinc price so far this year. He noted that during the first four months of the year, mine production fell 8.1% from the same time a year earlier due to declines in Australia, India, Peru and Ireland.   The straw which may have finally broken the camel’s back was that Vedanta Resources made its last zinc shipment from its Lisheen Mine in Ireland, which for the last 17 years had produced an average 300,000 tonnes of zinc and 38,000 tonnes of lead concentrate per year.

This has been coupled with an expected increase in the demand the demand for refined zinc expected to increase 3.5% this year. A large percentage of this growth can be attributed to China, which is still investing heavily in infrastructure, even as money supply growth has slowed.  But the other big factor has probably been record automobile sales in the U.S. and China, the world’s largest automobile market, recording the sale of 10.7 million vehicles in the first five months of the year –  an impressive year-over-year increase of 7%.

In terms of oil and natural gas, the other two big gainers this year, as is usually with such market moves they were almost certainly sold down more than they should have been last year as the media and analysts fell over each other to predict further declines – more on momentum perhaps than real supply/demand data.  But, the aforementioned climb in automobile sales coupled with some significant falls in output, have presaged a very strong recovery in crude oil prices.  As Holmes pointed out: “Unplanned production outages in Canada, Nigeria, Iraq and elsewhere removed a collective 3.6 million barrels per day off the market in May alone. Coupled with ongoing declines in the North American rig count—U.S. crude production is now at a two-year low—this helped nudge prices up to levels not seen since July 2015… At the same time, global consumption is expected to increase by 1.5 million barrels a day both this year and next, according to the U.S. Energy Information Administration (EIA), with North America and Asia, particularly China and India, responsible for much of the growth.”

Much as the precious metals complex tends to be dragged up by movement in the gold price, natural gas tends to benefit from movement in crude oil prices which probably accounts for gains here, although again the decline in fracking activity in the U.S. on economic grounds given the low gas prices will not have hindered here.

The other sector worth commenting on here has been a decent rise in pgm prices – of platinum in particular, although palladium, – continually pushed by the analysts as being the likely best performer in the precious metals  complex has continued to underperform relative to its peers.  In H1 platinum was up 14.7% and palladium only 6.5%.  Both should perhaps have been boosted by the strong automobile sales figures in particular, while some supply disruptions in South Africa will also have contributed.  Both metals are expected to see a supply deficit this year, but the pricing situation is continuing to be undermined due to large stocks of both metals being held out there and possible liquidations out of ETfs.

So while precious metals continue to be the focus of much commodity and equity investment interest, it is worth keeping an eye on some of what might be considered the more mundane metals and minerals.  Like the precious metals, many of these have perhaps been oversold in the downturn years and others could be set for similar big rises.  It’s a question of getting one’s timing right to benefit from these gains.  Copper, nickel and lead have been laggards in any pick-up so far this year and coal remains hugely depressed.  Could we see a turnaround in any of these?  At some stage we probably will as low prices impact supply and, in most cases, annual demand continues to grow.  As noted above timing is everything in commodity investment.

Silver Takes the Gold: Commodities Halftime Report 2016

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Silver Takes the Gold: Commodities Halftime Report 2016

Here we are at the halfway point of the year, less than two months away from the Rio 2016 Olympic Games. As a group, commodities are the top performing asset class, comfortably beating domestic equities, the U.S. dollar and Treasuries.

Commodities, the Top Performer in First Half of 2016

Below is our ever-popular Periodic Table of Commodities Returns, updated to reflect the first half of 2016. Click to see an enlarged version.

The Periodic Table of Commodity Returns
click to enlarge

Commodities’ performance is quite a reversal from the weakness we’ve seen lately, particularly last year, but we shouldn’t expect another 2004 or 2005, when global trade was humming. Conditions are still not ripe for a real takeoff, with manufacturing activity in China and the eurozone struggling to gain momentum.

But there’s hope. Many of the challenges standing in the way of growth were exposed when Britain voted last month to leave the European Union (EU), which I’ve been writing about for the past few weeks. Most recently, I highlighted some of the winners to emerge from Brexit, among them gold investors, U.S. homeowners and British luxury goods makers.

Hopefully we can add global trade to the list. Brexit has brought to light some of the corruption and economic strangulation by regulation that chokes the flow of capital. Last week I had the opportunity to speak with some EU citizens. Their frustration was palpable. The cronyism among the EU’s unelected officials is nothing new, but it’s only worsened over the past decade and a half, they said. The British referendum has encouraged a balanced, intercontinental discussion on the direction Brussels must take now that the corruption and depth of discontent have been exposed for the world to see.

Precious Metals Shine Brightly on Macroeconomic and Geopolitical Concerns

Silver demand had a phenomenal 2015, with retail investment and jewelry fabrication both reaching all-time highs. Led by consumers in the U.S. and India, coin and bar investment soared 24 percent from the previous year, while jewelers gobbled up a record 226.5 million ounces. According to the Silver Institute’s World Silver Survey 2016, metal demand for photovoltaic installation climbed 23 percent in 2015, offsetting some of the losses we continue to see in photographic applications.

Global Demand for Silver Bars Surged 24% in 2015
click to enlarge

Caused by worries of a summer interest rate hike and uptick in the U.S. dollar, gold and silver both stalled in May but have since rallied on the back of Brexit and with government bond yields in freefall. For the first time ever, Switzerland’s entire stock of bonds has fallen below zero, with the 50-year yield plummeting to negative 0.03 percent on July 5.

Switzerland 50-Year Bond Yield
click to enlarge

All-time low yields can also be found in the U.S.—where the 10-year Treasury yield fell nearly 38 percent in the first half—U.K., Canada, Germany, France, Australia, Japan and elsewhere. Roughly $10 trillion worth of global government debt, in fact, now carry low to subzero yields.

This has been highly constructive for gold and silver, as yields and precious metals tend to be inversely related.

What’s more, the rally doesn’t appear to be done, with UBS analysts making the case last week that we’re in the early stages of a new bull run. Credit Suisse sees gold testing the $1,500 an ounce mark as early as the beginning of 2017. As for silver, some forecasters place it at between $25 and $32 an ounce by year’s end.

The risk now is that higher prices are pushing away some potential investors. Today Bloomberg reported that gold imports in India plunged a sizable 52 percent in the first half of 2016, compared to the same period in 2015.

Supply and Demand Rebalancing?

Much of the price appreciation has been driven by a global rebalance in supply and demand. Dismal prices over the last couple of years compelled explorers and producers to cut activity and other capital expenditures, while demand continues to rise.

This dynamic certainly helped  zinc, the best performing industrial metal of 2016 so far. During the first four months of the year, mine production fell 8.1 percent from the same time a year earlier due to declines in Australia, India, Peru and Ireland, according to the International Lead and Zinc Study Group. In January, London-based Vedanta Resources made its last zinc shipment from its Lisheen Mine in Ireland, which for the last 17 years had produced an average 300,000 tonnes of zinc and 38,000 tonnes of lead concentrate per year.

Meanwhile, the demand for refined zinc, used primarily to galvanize steel, is expected to increase 3.5 percent this year. What might surprise you is that a large percentage of this growth can be attributed to China, which is still investing heavily in infrastructure, even as money supply growth has slowed.

This rebalancing has also bolstered crude oil prices, up 73 percent since its 2016 low in February. Unplanned production outages in Canada, Nigeria, Iraq and elsewhere removed a collective 3.6 million barrels per day off the market in May alone. Coupled with ongoing declines in the North American rig count—U.S. crude production is now at a two-year low—this helped nudge prices up to levels not seen since July 2015.

Month-over-month change in global oil supply disruptions
click to enlarge

At the same time, global consumption is expected to increase by 1.5 million barrels a day both this year and next, according to the U.S. Energy Information Administration (EIA), with North America and Asia, particularly China and India, responsible for much of the growth.

Record Automobile Sales Support Commodities

Crude consumption is also being supported by robust automobile sales, which set a six-month record in the U.S. following six straight years of growth. Between January and June, sales reached an all-time high of 8.65 million units, up 1.5 percent from the same period last year. In China, the world’s number one auto market, 10.7 million vehicles were sold in the first five months, an impressive year-over-year increase of 7 percent. Sales of light vehicles, especially motorcycles, have been strong in India.

As you might expect, this has likewise benefited demand for platinum and palladium, both used in the production of autocatalysts. The CPM Group anticipates palladium demand to reach an all-time high this year, up 3 percent from last year, on tightened emissions standards and the purchase of larger cars and trucks in the U.S. on lower fuel costs. (The larger the engine, the more palladium or platinum is needed to reduce emissions.)

Autocatalyst Production Driving Palladium Demand
click to enlarge

Since January, the platinum group metals (PGMs) have increased over a third in price, marking the end of an 18-month bear cycle, according to Metals Focus’ Platinum & Palladium Focus 2016. Fundamentals have improved since last year, when EU growth concerns and Volkswagen’s emissions scandal weighed heavily on investment prospects.

Like zinc, crude and other commodities, the PGMs were supported the last six months by lower output levels, as labor disputes in South Africa—the world’s largest platinum producer and number two largest palladium producing country—disrupted operations.

Stock Markets Erase Brexit Losses: Is the Fallout Already Behind Us? – An American viewpoint

By Clint Siegner*

The UK’s UKIP party leader, Nigel Farage, toiled for 17 years building a movement to lead the United Kingdom out of the European Union. A week ago, he stood in front hundreds of drab bureaucrats in the EU Assembly, most of whom have done little but snicker at his free-market ideals, and declared victory. He told them, quite plausibly, their political union is dying – and good riddance!  – [Editor: He has now resigned leadership of UKIP saying his job is done, but will undoubtedly remain vociferous in his anti-EU views]

UK Independence leader Nigel FarageUK Independence Party leader Nigel Farage

Fans of ‘liberty’ cheered for Farage and for Brexit. And, after the sharp recovery in equity indexes around the world, it looks like stock investors have begun cheering as well. Many say stock market losses sustained in the first couple of trading days were an overreaction. Maybe. Or maybe not.

It is way too early to sound the “all clear” signal, and the real Brexit fallout may still be ahead. The pound sterling is continuing to fall for example.  Here are some other developments that investors should weigh carefully…

Bond markets are not confirming the move higher in stocks. The yield on a U.S. 10-year bond made a new all-time low on Friday at 1.385%. German 10-year Bunds yield -0.12%. That’s right – a negative yield! Bund investors must pay the German government for the “privilege” of lending them funds.

That doesn’t jive with the rally in stocks. There are essentially two groups of people. One is buying stocks aggressively, shouting “Risk On!” The other is loading up on Treasuries and other “low risk” debt as a safe haven. One of these groups is likely to be horribly wrong.

The surge in precious metals prices corroborates the flight to safety we’re seeing in bonds. Bonds and metals may be telling investors something wicked this way comes.

Maybe we’ll see a new bank crisis. All is not well with global banks, and Brexit isn’t helping.

In news that was largely overlooked, EU officials just granted a $150 billion emergency bailout measurefor Italian banks who are drowning in bad debt. Italian officials used the panic around Brexit and fear of a run on their banks to lobby for the special accommodation. Portuguese banks aren’t in much better shape.

Deutsche Bank Collapse

Then there is Germany’s Deutsche Bank (NYSE:DB). Last week the IMF hammered DB in a report labeling the troubled German firm as theriskiest financial institution in the world. DB holds something on the order of $70 trillion dollars in notional value of derivatives exposure. It also carries lots of “non-performing” loans.

And the low-interest-rate regime imposed by European Central bank is suffocating profitability.

Bankers introduced the world to the concept of “systemic risk” when Lehman Brothers collapsed. We discovered banks like to buy and sell derivatives such as Credit Default Swaps, purportedly to hedge risks. Some trader with Bank A buys the diseased bonds of Institution B. Or maybe the trader simply doesn’t like the prospects of B and wouldn’t touch the bonds with a 10-foot pole. Either way he figures B just might default, so A buys insurance in the form of a CDS from Firm C. It works great until B craters and takes C, who has been busily selling a bunch of these swaps to any and all comers, with them.

That’s what happened in 2008. The daisy-chain collapse began with Lehman Brothers and ended when the central bankers and bureaucrats stepped in with your money to make good on the spiraling losses.

There is no telling if Deutsche Bank or some other troubled bank is going to fail and set off a new daisy-chain. We can only say with certainty some smart people seem pretty worried about it. DB shares are trading well below the 2008 crisis lows, and the price of DB credit default swaps have risen dramatically.

EU favorability varies widely in Europe

Much of the Brexit fallout is political and hard for markets to quantify. When Nigel Farage said the European Union is dying, he wasn’t just “Whistling Dixie.” Exit movements all over Europe got a big leg up following the British referendum, but EU favorability has been in decline for some time now. Debt crises and the flood of middle-Eastern refugees have people doubting if an unelected and unaccountable bureaucracy in Brussels will provide the solutions they seek.

Investors should note support for the EU is even lower in France and in Greece than it was in the UK. Spain, Germany, and the Netherlands aren’t far behind. Brexit may well signal the beginning of the end for the EU.

If it turns out Farage is right and the EU dies, markets won’t have much trouble finding the right answer with regard to the value of the euro. It will return to its intrinsic value: zero. In the meantime, we could be in for some wild market action as people on both sides of the political question line up and place their bets.

A Classic Case of Failed Socialism: What’s Next After the Brexit?

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

Brexit Vote

Defying sentiment polls leading up to last week’s historic Brexit referendum, British voters said “thanks, but no thanks” to excessive EU taxation and regulation, choosing to take back Britain’s sovereignty in financing, budgeting, immigration policy and other areas essential to a nation’s self-identity. It was a momentous victory for the “leave” camp, led by former London mayor Boris Johnson and U.K. Independence Party leader Nigel Farage, who invoked the 1990s sci-fi action film “Independence Day” by declaring June 23 “our independence day” from foreign rule.

As I’ve been saying the last couple of weeks, British citizens and businesses have grown fed up with an avalanche of failed socialist rules and regulations from Brussels, responsible for bringing growth and innovation to a grinding halt. Even if the referendum had gone the other way, it should still have served as a wake-up call to the European Union’s unelected bureaucratic dictators. Euroscepticism and populist movements are gathering momentum in EU countries from Italy to France to Sweden, and the week before last, fiercely independent Switzerland, which voted against joining the EU in the 1990s, finally yanked its membership application for good.

American voters should be paying attention. Many have already pointed out the parallels between the Brexit movement and Donald Trump’s populist campaign for president. This connection was not lost on Trump, who tweeted early Friday morning: “They took their country back, just like we will take America back.”

Britain’s decision to leave exposes the fragility of trade right now and mounting apprehension toward globalization. The EU is mired in tepid growth, and the blame cannot be pinned on immigrants, as some have tried to do. Instead, Brussels’ policies are anti-growth. Moore’s Law says the number of transistors in a microchip doubles every two years. That’s just a fact. American entrepreneurs embrace and indeed push the limits of technological innovation, but “Eurocrats,” to a large extent, seem to be in open opposition to it. This is why many large, successful American tech firms such as Facebook and Google are treated with such hostility in Europe. The bureaucrats are so against growth and prosperity, it wouldn’t surprise me if they tried to do away with Moore’s Law.

A Legendary Day for Gold

Immediately after results were announced, the British pound sterling, one of the world’s reserve currencies, collapsed spectacularly against the dollar, plunging to levels not seen since Margaret Thatcher’s administration. The euro, the world’s only fiat currency without a country, fell more than 2 percent.

Gold, meanwhile, screamed past $1,300 an ounce to hit a two-year high, proving again that the yellow metal is sound money and fervently sought by investors worldwide as a safe haven during times of economic and political uncertainty.

Gold and British Pound Make Huge Moves Following Brexit Referendum
click to enlarge

Uncertainty is indeed the order of the day. As the World Gold Council (WGC) put it on Friday, “It is difficult to find an event to compare this to.” Trading blocs have fractured before, but none as large and significant as the EU. As the world’s fourth most liquid currency, gold saw massive trading volumes. At the Shanghai Gold Exchange, an all-time record amount of gold was traded following the Brexit—the equivalent of 143 tonnes in all.

“We expect to see strong and sustained inflows into the gold market, driven by the intense market uncertainty that now faces the global markets,” the WGC wrote.

The Brexit lifted not just bullion but gold stocks as well, with many of them climbing to fresh highs. Shares of Barrick Gold shot up 10 percent in early-morning trading while Yamana Gold and Newmont Mining both saw gains of over 8 percent.

I’ve always advocated a 10 percent weighting in gold—5 percent in physical gold, 5 percent in gold stocks—with rebalancing done on a quarterly basis. Gold is now up at least one standard deviation for the 60-day period, meaning now might be a good time to take some profits and rebalance. It’s been a spectacular six months!

So What Happens Now?

As I said, global growth is unstable, especially in the EU, and the Brexit will only add to the instability. This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.

It should be noted that the country will remain a member of the EU for two more years, during which time the nature of the relationship following the official divorce can be negotiated. These negotiations will take place without David Cameron, who unexpectedly announced early Friday morning that he was stepping down as prime minister.

The results of the referendum also call into question the unity of the kingdom itself. England and Wales both voted to leave the European bloc while Scotland and Northern Ireland were aligned in their desire to remain members.

Gold soars to 2-year high: The Holmes Gold SWOT

By Frank Holmes, CEO & Chief Investment Officer, U.S. Global Investors

Strengths
  • The best performing precious metal for the week was palladium, rising 2.24 percent. Palladium surged early in the week, doing just the opposite of gold, when polls indicated British voters were more likely to vote “remain” in the Brexit referendum, thus economic uncertainty would be maintained.
  • However, the palladium price dropped on Friday as gold soared to a two-year high following the U.K.’s vote to exit the European Union, boosting haven demand. According to Bloomberg, U.K. voters backed leaving the EU by 52 percent to 48 percent, causing turmoil across markets and prompting Prime Minister David Cameron to resign.
  • Gold dealers in London say they have never seen anything like it, describing the rush from consumers to sell gold, and many more to buy the precious metal following the U.K.’s vote to exit the EU. “We’re doing 10 times the business we normally do,” said Michael Cooper, commercial director of ATS Bullion Ltd. BullionVault saw its busiest day ever on Friday, reports Bloomberg.
 Weaknesses
  • Despite the surge in gold prices on Friday following the U.K. vote, it was the worst performing precious metal for the week, although still up 1.43 percent. Gold backed ETFs have seen a surge in assets this year as investors have started to discount that political leaders at the central banks around the world have lost their mojo, as you can see in the chart below.

HGS276

  • Gold experienced weakness most of the week, falling for the first four days of the week as polls on the Brexit referendum showed uneven results. Gold tumbled by the most in almost a month as other polls on Monday showed voters tilting toward remaining in the EU.
  • Kinross Gold Corp. temporarily halted mining at its Tasiast mine in Mauritania, reports Bloomberg, after the Ministry of Labor banned some of its expatriate workers from the site due to invalid work permits. The stoppage comes a week after a three-week strike by unionized workers ended at the mine, one Seeking Alpha article points out.
Opportunities
  • According to the median of 12 forecasts in a Bloomberg survey of analysts and traders from New York to Canada, gold prices could reach as high as $1,424 an ounce by year end, reports Bloomberg. “The Brexit referendum lowered the probability for an interest rate hike,” said commodity analyst Thorsten Proettel. Low rates are a boon to gold because it increases the metal’s appeal as a store of value, the article continues..
  • Capital spending by gold producers has been decimated, writes Sean Gilmartin at Bloomberg, which will lead to a long-term decline in the mine supply of the metal. According to UBS, high quality gold equities still offer attractive leverage to gold price upside, and will outperform physical gold in a rising price environment. Other opportunities for the metal come in the mergers and acquisitions space, reports the Financial Review, particularly in the West African-focused gold space driven by strong acquirers out of North America. In an all-share deal, Teranga Gold made an offer to buy Gryphon Minerals, boosting its share price by 22 percent on the news.
  • Hartley’s reports on Burey Gold Limited this week, noting the company’s release of significant drilling results from its maiden RC drilling program in the northern zone of its Giro project. Highlights include 2 meters at 196 grams per ton from 12 meters, and 15 meters at 255.6 grams per ton from 15 meters. Additional results include 33 meters at 6.1 grams per ton from surface and 12 meters at 21.2 grams per ton from 3 meters. Hartley’s writes “These results confirm our opinion that the Giro project has potential to define a company-making asset particularly given these significant high grade results.”
Threats
  • Physical demand for gold out of both India and China was tepid during the first half of the year, reports Bloomberg. Demand was historically weak in India, with the discount averaging $25 an ounce in 1H versus $8 a year ago. Also contributing to the overall weakness was a poor farming year in India, continues the article, yielding less disposable income for Indians to buy gold.
  • Although a vote for Brexit will benefit gold, reports SocGen, other commodities such as copper and oil could suffer. Mark Keenan, SocGen Asia head of commodities, points out that a rising U.S. dollar will depress metals such as copper, and risk aversion may hurt oil.
  • In a note from Sovereign Man this week, the author reflects on how much has changed since the publication started seven years ago. He points out that U.S. government debt soared 70 percent, that the Federal Reserve’s balance sheet more than doubled, and that the U.S. government has been caught red-handed spying on everyone – all in seven years’ time. “We’ve seen an appalling rise in police violence and Civil Asset Forfeiture to the point that the U.S. government now steals more than every thief in America combined,” he continues. Perhaps Donald Trump is right in that Mexico will pay to build a wall on its northern border, which is to keep Americans from crossing illegally into Mexico.

 

Should the platinum:gold ratio be traded as it hits extremes?

By Stefan Gleason, President Money Metals Exchange

The gold:silver ratio hit a multi-year high of over 83:1 earlier this year. It has since come down to 73.4:1, as of Friday’s close, as silver has gained strength in this year’s rally. On a historical basis, silver remains a relative bargain compared to gold. The ratio has much further to fall in a major bull market.

Another important ratio is that of gold to platinum. To gauge whether platinum is trading at a premium or discount to gold, we can simply reverse the ratio. This year platinum traded at its deepest discount to gold since 1982. The platinum:gold ratio currently comes in at 0.8:1, meaning an ounce of platinum sells for 80% of what an ounce of gold commands.

Platinum:Gold Ratio, 1980 to Present

Platinum:Gold Ratio from 1980 - Present

As a general rule of thumb, platinum is a great bargain when it sells for less than gold. As the chart shows, the platinum:gold ratio periodically gets drawn back like a magnet to price equilibrium at 1.0. It’s not a law that platinum must return to equilibrium with the gold price or spend more time than not exceeding it. It just happens to be a strong tendency supported by sound fundamental reasons, including platinum’s supply scarcity.

When platinum’s discount gets to a multi-decade extreme, as it is now essentially, then precious metals investors have an incentive not only to favor platinum over gold – but to trade out of gold for platinum.

We certainly don’t recommend giving up a core position in gold. Gold has unique qualities as the ultimate, most recognized form of money. However, for those who have accumulated an outsized position in gold and hold little or no platinum, now may be an opportune time to trade some gold for some platinum.

Let’s take an example to illustrate the potential profit opportunity. You sell 10 ounces of gold (10 x $1,275 = $12,750), then use the proceeds to buy 12 ounces of platinum (12 x $994 = $11,928). In this example, based solely on the latest closing spot prices, you’d still have $822 cash left over. (In the real world, bid/ask spreads, premiums, and small transaction costs would apply.)

Let’s assume you wind up getting an exact even exchange of 10 gold ounces for 12 platinum ounces. Three years later, the ratio has risen from 0.8 to 1.2, around the historical average. Gold now trades at $2,000/oz and platinum 1.2 times that at $2,400. The ten gold ounces you sold would be worth $20,000. The 12 platinum ounces you bought are now worth $28,800. Thus, trading the platinum to gold ratio boosted your precious metals wealth by 44%!

This hypothetical should not be interpreted as a prediction of future price outcomes. It’s merely an illustration of one type of scenario that could play out.

China’s SGE gold withdrawals in April 171 tonnes

The latest announcement from China’s Shanghai Gold Exchange (SGE) shows that  gold withdrawals for April totalled 171.4 tonnes so remain subdued compared with the past couple of years.  For the first four months of the year 687.3 tonnes were withdrawn, very sharply below the 820.6 tonnes at this stage a year earlier (admittedly a record year) – representing a fall of over 19% year on year. However, even at the current lower monthly rate taken out over the full year this would suggest SGE withdrawals remaining at over 2,000 tonnes for the full year  Thus even at a lower level Chinese gold demand as represented by SGE withdrawals – although there are some arguments from top analysts that these overstate the nation’s true absorption of physical gold – do account for a very significant proportion of the world’s newly mined supply of gold – currently around 3,200 tonnes a year.

Indian gold imports have also been low in the first four months – initially due to demand being held back ahead of the late February budget in the hope of a reduction in import duties – and subsequently due to strike action by the jewellery sector disappointed that the duty cuts were not forthcoming.  Thus the recent performance of gold, given what has been a strong downturn in Asian demand, has been all the more remarkable.

To a significant extent growth in Western demand, represented by purchases into the major gold ETFs and strong buying of gold coins and investment bars has been making up a lot of the shortfall from Asia. The biggest of the gold ETFs, SPDR Gold Shares (GLD) for example, has added around 192 tonnes of gold so far this year alone. It is still hugely below its peak, but is currently back at a level last seen in December 2013 with holdings at the end of last week at 834.19 tonnes.  It has put on 30 tonnes since the end of April.  And according to Bloomberg i inflows into all the gold ETFs it follows totalled around 330 tonnes in Q1 alone.  It thus looks as though ETF inflows are taking up any slack represebted by what is very probably a temporary downturn in Asian demand and gold flows.

The other contributor to the strong price performance in terms of logistics rather than just sentiment is that physical gold actually appears to be in relatively short supply with available inventories falling in the USA and the UK, where most is held.  The head of one of Switzerland’s largest gold refineries recently told Jim Rickards of problems in securing sufficient supplies to meet demand.  With new mined gold supply almost certainly plateauing, and possibly even beginning to turn down, demand shortages could be exacerbated further.   A recent analysis by Paul Mylchreest, who many may remember as the author of the sadly missed Thunder Road Report also even suggests that the London Bullion Market may even be in deficit.

 

Q1 gold and silver rally different this time around

A Paper Gold Rally – Physical Yet To Engage

by Ross Norman – CEO Sharps Pixley Ltd.

The key question in our mind is whether a paper rally in gold can be sustained without the significant engagement of the physical community…

During 1Q16, physical demand for gold declined 23.8% compared to 1Q15 according to GFMS (1025 tonnes Vs 781 tonnes) yet gold prices rallied 22% – res ipsa loquitur.

Gold’s gain year-to-date is impressive – not to say exceptional – and gold bugs will heave a sigh of relief that it has behaved as it should in the face of what is clearly a vulnerable, even fragile macroeconomic outlook. However 2014 and 2015 saw similar rallies before momentum fade set in after Q1 in both years and hence not surprisingly confidence remains light, particularly in view of the size able 45% correction since 2011.

2016 is different.

Yes, gold has seen a similar price action, but the drivers are not the same. The key physical gold markets in China and India are comparatively speaking absent and the erstwhile seller – the West – has turned buyer.  This is not a question of geography, but of motivation, form and tenure.

The correction lower from all time highs at $1922 in 2011 were driven by selling across the spectrum of the gold community in the West. European Central banks had already disgorged sizeable chunks of metal under the Washington Accord and then it was instititutional investors selling of ETFs (roughly 1000 tonnes), coupled by speculators on COMEX who sold their long futures positions and the market went into a rare net short position – and then there was cash-for-gold at the retail end – not in itself significant in size, but it underscored the West falling out of love with gold and cashing it in to sustain the consumption binge of the early 2000’s.

Never before was there such an epic movement of bullion from West to East in exchange for fripperies since the days of Marco Polo and the silk road.

This year on COMEX we have seen a battle royal between the longs and the shorts with the former winning out. The short covering has played a key role in taking the market through key technical levels and net longs stand at close to record highs. This should leave gold bulls – especially contrarians like myself – feeling distinctly uncomfortable. Meanwhile ETF flows have risen at record pace adding 330 tonnes in Q1 (compared to just 36 tonnes in Q1 2015). Now it could be argued that ETFs are paper or physical – this is irrelevant – what matters is how they behave and as we saw since 2011 these players can operate with the same short termism as speculators and rapidly reverse their positions. In short neither can be entirely trusted.

Meanwhile Indian buyers are absent as its government behaves as if it was at war with its gold community (and 3,000 years of history) through punitive taxes ; the market remains lacklustre with prices at a 2 1/2 year high in local terms and is not much helped by a poor monsoon and therefore harvest. The Chinese and indeed Russians meanwhile seem content to pick metal up on any price correction (more traditionally the Indian style) and not chasing the market higher – price supportive, but not a driver. GFMS reports that physical purchases for 1Q16 declined in India by nearly 65% compared to 1Q15.

So what has changed. There is growing perception in the West that Cental Banks may indeed be fallible and that the Keynesian experiment may have run its course – in short, the desire for sound money and by extension a growing concern about the increase in debt to resolve financial crisis is gaining currency. If fear is back in vogue then arguably it may less of a sustainable position then the motivation of many Eastern buyers which is simply as long term store of value.

For gold to see a sustained rally it needs to fire on more than one cylinder and physical players need to join the party. This in turn would put bullion onto the radar of institutional investors who are yet to be convinced that it really is an alternative to more traditional asset classes. This could then bring about the price elasticity – or buying on higher prices – that typified the last bull run. Or equally perhaps physical buyers do not turn up to the party in which case the speculators – sometimes described as behaving like 11 year olds high on e-numbers – could get bored and as easily reverse their positions.

 

Time will tell.

Silver Wheaton: The Ultimate Streaming Service

Frank Holmes, CEO and Chief Investment Officer for U.S. Global Investors expounds on the methodology employed by streaming company, Silver Wheaton, which he views as one of the lowest risk ways of investing in the upturn in precious metals stocks:

Silver Wheaton CEO Randy Smallwood (right) with USGI portfolio manager Ralph Aldis

“There’s a healthy appetite for streams right now.”

That’s according to Randy Smallwood, CEO of Silver Wheaton, who stopped by our office last week during his cross-country meet-and-greet with investors.

Randy should know about the appetite for streams. His company had a phenomenal 2015—“the best year we ever had,” he says—highlighted by two successful stream acquisitions, strong production and fully-funded growth. Silver Wheaton stock is up more than 51 percent for the year. And the company just received the Viola R. MacMillan Award, presented by the Prospectors & Developers Association of Canada (PDAC), for “demonstrating leadership in management and financing for the exploration and development of mineral resources.”

We were one of Silver Wheaton’s seed investors in 2004. In the summer of that year, the company was spun off from Wheaton River, a producer that took its name from a stream in the Yukon where one of its mines, the Luismin property, produced silver. It was founded by Ian Telfer, chairman and CEO of Wheaton River, and the company’s then-chief financial officer, Peter Barnes, who later headed up Silver Wheaton management. My friend, the mining financier and philanthropist Frank Giustra, also had a hand in its conception.

As the only pure silver mining company, Silver Wheaton couldn’t have been founded during a more opportune time. The commodities boom was still young. I remember that when the idea for the company was shared with me, what I found most attractive was that it had virtually no competition.Franco-Nevada, which had been acquired by Newmont in 2001, wouldn’t be spun off for three more years. It was a no-brainer to put capital in this new endeavor.

Wheaton River was eventually bought by Goldcorp—the entire story is told at length in the book “Out of Nowhere: The Wheaton River Story”—and today, Silver Wheaton is the world’s largest precious metals streaming company, with a market cap of over $9 billion.

But Wait, What’s a “Stream”?

A “stream,” in case you were wondering, is an agreed-upon amount of gold, silver or other precious metal that a mining company is contractually obligated to deliver to Silver Wheaton in exchange for upfront cash. (The company’s preferred metal is silver because, as Randy puts it, it’s a smaller market and has a higher beta than gold.) The payment generally comes with less onerous terms than traditional financing, which is why miners favor working with Silver Wheaton (or one of the other royalty companies such as Franco-Nevada, Royal Gold and Sandstorm.)

Overview of Royalty and Stream Financial Model
click to enlarge

Streaming allows producers to “take the value of a non-core asset and crystallize that into capital they can invest into their core franchise,” Randy explains in a video prepared for the PDAC awards.

With operating costs mounting and metals still at relatively low—albeit rising—prices, royalty and streaming companies have become an essential source of financing for junior and undercapitalized miners. Between 2009 and 2014, operating and capital costs per ounce of gold rose 50 percent, from $606 to $915 per ounce, according to Dundee Capital.

Gold and Silver at 15-Month Highs

Paradigm Capital estimates that between 80 and 90 percent of global miners’ operating costs are covered when gold reaches $1,250 an ounce. The metal is now at this level—it’s currently at $1,298, up 22 percent so far this year—but as recently as December, prices were floundering at $1,050, which cut deeply into producers’ margins.

Royalty and streaming companies, on the other hand, get by with a materially lower cost of $440 an ounce.

From only 11 stream sales in 2015, miners collectively raised $4.2 billion, which is double the amount they raised in 2013.

These partnerships are a win-win. The miner gets reliable, hassle-free funding to cover part of its exploration and production costs, and the streaming company gets all or part of the output at a fixed, lower-than-market price. A 2004 streaming arrangement made with Primero on the San Dimas mine in Mexico entitles Silver Wheaton to buy all of its silver for an average price of $4.35 an ounce. With spot prices now at more than $17.89 an ounce, up 29 percent year-to-date, the San Dimas property is one of Silver Wheaton’s more lucrative assets. (The mine represents an estimated 15 percent of Silver Wheaton’s entire operating value, according to RBC Capital Markets.)

As part of its contracts, Silver Wheaton gets the added value of optionality on any future discoveries. This is important, since an estimated 70 percent of all silver comes as a byproduct of other mining activity, including gold, zinc, lead and copper. According to Randy, all of Silver Wheaton’s silver is byproduct.

Seventy Percent of Silver Is a Byproduct of Other Mining Activity

click to enlarge

Huge Rewards, Minimal Risk

Investors find royalty companies such as Silver Wheaton attractive for a number of reasons, not least of which is that they have exposure to commodity prices but face few of the risks associated with operating a mine.

They have minimal overhead and carry little to no debt. Franco-Nevada, in fact, added debt for the first time ever last year to buy a stream from Glencore. By year-end, the company had already paid down half this debt, and it plans to tackle the rest this quarter.

Royalty companies also hold a more diversified portfolio of mines and other assets than producers, since acquiring new streams doesn’t require any additional overhead. This helps mitigate concentration risk in the event that one of the properties stops producing for one reason or another.

Royalty Companies Hold a More Diversified Portfolio of Assets

Consequently, margins have historically been huge. Even when the price of gold and gold mining stocks declined in the years following 2011, Franco-Nevada continued to rise because it had the ability to raise capital at a much lower cost than miners. And with precious metals now surging, royalty companies are highly favored, with Paradigm Capital recommending Franco-Nevada, which has “exercised the most buying discipline among the royalty companies,” and the small-cap, highly diversified Sandstorm.

Gold Royalty Company vs. Gold Bullion vs. Gold Miners
click to enlarge

With only around 30 employees, Silver Wheaton has one of the highest sales-per-employee rates in the world. According to FactSet data, the company generates over $23 million per employee per year. Compare that to a large senior producer like Newmont, which generates “only” $200,000 per employee.

Royalty Companies Have a Superior Business Modelclick to enlarge

Royalty companies can often minimize political risk because they don’t normally deal directly with the governments of countries their partners are operating in. This is especially valuable when working with miners that operate in restrictive tax jurisdictions and under governments with high levels of corruption. Silver Wheaton’s contract with Brazilian miner Vale, for instance, stipulates that Vale is solely responsible for paying taxes in Brazil, which are among the highest in Latin America. Vancouver-based Silver Wheaton pays only Canadian taxes.

Political risk is still a thorny issue, however. When government corruption is too pervasive, or the red tape too tortuous, the miner’s corporate guarantee is obviously threatened. In cases such as this, Silver Wheaton can simply elect not to work with the producer, as it had to do recently with an African producer.

A key risk right now is Silver Wheaton’s ongoing legal feud with the Canadian Revenue Agency (CRA), regarding international transactions between 2005 and 2010. Randy says the company might finally be nearing a resolution to the dispute.

“We do have resource risk. We do have mining production risk,” he says. “But with that risk comes rewards, and I think if we’re selective in terms of our investments, the rewards far outweigh the risks. I think we’ve been really successful making sure we invest in good quality, high-margin mines. We really put a strong focus on mines that are very profitable.”

Gold, silver and platinum rallying – The Holmes SWOT

Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, gives us his latest report on Strengths, Weaknesses, Opportunities and Threats in the precious metals markets as reported in global media over the past week

Strengths

  • The best performing precious metal for the week was platinum, up 6.38 percent.  Platinum largely moved in sync with gold and silver price changes, but has recently outpaced its counterparts and has now begun to play a significant catch-up trade.
  • The Bank of Japan (BOJ) opted against boosting stimulus this week, in a decision that battered the U.S. dollar and gave gold a surprise lift, reports Bloomberg. The Japanese yen also reacted to the bank’s decision, surging the most since the 2010 stock-market meltdown. On Wednesday, the Federal Reserve left its benchmark rate unchanged too, helping to boost the yellow metal.
  • According to the South China Morning Post, the Chinese Gold and Silver Exchange Society plans to set up a gold vault and office in Qianhai. This will be the biggest in Hong Kong investment in the special economic zone in Shenzhen, reports Bloomberg.  Jeremy Wrathall, Investec’s Global Head of Natural Resources, thinks that gold is likely to be the best performer among global metals and minerals for 2016, reports Lawrie Williams.

Weaknesses

  • The worst performing precious metal for the week was palladium, still up 3.93 percent, and not far behind the other precious metals (all of which closed in positive territory). Palladium was the best performer in the precious metals group last week, when it closed up 5.99 percent.
  • Commodity exchanges boosted margin requirements on more products, reports Bloomberg, sending stocks in China to the lowest in a month. “The boom in the commodity markets isn’t a good thing for stocks as that will distract some investors and divert money away from the stock market,” said Wu Kan, a fund manager at JK Life Insurance in Shanghai.
  • The metals and mining sector is the top performer in both high-grade and high-yield indexes this year, according to BI Senior Credit Analyst Richard Bourke. But has the rally in metals and mining bonds come too far, too fast? An analysis of commodity spot prices shows that they are all above consensus forecast price, and may portend a correction.

Opportunities

  • RBC Capital Markets released a research piece on its gold companies under coverage on Monday, explaining that a decline in production and growth expenditures is expected in 2016. Overall gold production of the North American companies listed in the report, is expected to decline by 7 percent year-over-year. Exploration and expenditure budgets continue to face downward pressure as well, leading to an ongoing decline in reserve lives. While this may appear negative at first glance, the forecast should bode well for acquisition activity to pick up later this year in a heated gold market.
  • HSBC has been bullish on gold since 2015 and the group believes that the strong rally this year could continue. In addition to gold’s inverse relationship with the U.S. dollar, HSBC points out that the group’s counter-consensus view of a strong euro, along with the expectation for the euro-dollar to continue trading higher.  Investors may also take a gold position to hedge against the upcoming UK vote to exit European Union membership.
  • Paradigm Capital released a comprehensive and informative research note this week, focusing on gold equities and opportunities to be found for the generalist. The group highlights negative interest rates and central banks buying gold (rather than selling it) as a few reasons why this up-cycle is different. Paradigm also states that “Producing gold is a better business than most today, one with expanding margins, yet gold equities still offer excellent relative value.”  In the chart below, this shows the long-term price relationship between gold bullion and gold mining stocks.  One can observe that the gold miner valuations are currently substantially depressed relative to the change in gold prices.

SWOT 2-5

Threats

  • Earlier this month, Deutsche Bank admitted to manipulation of the gold and silver price fix, agreeing to turn in any information about other banks’ wrongdoings over to the authorities. In an article from ZeroHedge this week, the group reminds its readers that the CFTC in 2013 closed its five-year investigation concerning these allegations, proudly stating there was no evidence of wrongdoing. Fast forward to April 22, 2016. The CFTC and its director have come out saying they were unaware of the DB story, finding no reference to it in the commission’s file of “news reports of interest.”
  • Could silver’s upswing be due for a correction? Another article from ZeroHedge this week points out that an old indicator, the commitment of traders report (COT), has been a pretty reliable gauge for precious metals’ “short-term trajectory.” However, since speculators are “exuberantly long” silver at this time, this could imply that a correction is coming.
  • Although no one is predicting a heavy fall for precious metals, a commodity specialist from the Industrial and Commercial Bank of China (ICBC Standard) thinks now is probably not the time to buy, reports News Markets. The bank pinpoints an already crowded market for this trade, as speculators have increased their long positions.

 

Gold and silver prices to continue higher through 2016: BLANCHARD

Blanchard & Company, CEO David Beahm says tepid GDP a sign of more highs for precious metals

NEW ORLEANS –

After a 30-year record price increase in gold during the first quarter of 2016, Blanchard CEO David Beahm feels both gold and silver are poised to attain to higher highs during the remainder of 2016 for several reasons, including decreased consumer spending evidenced by weak GDP growth, and a stagnant global economy that has generated new negative-interest stimulus efforts by various central banks.

“Gold prices should continue to climb throughout 2016 as investors look for stable assets during what appears to be a troubling time ahead,” Beahm said. “Consumer spending accounts for two-thirds of America’s total GDP, but through the first quarter of 2016 it is about one-third less than predictions for the year and well below its performance in 2015. This is not a sign that the economy is flourishing – quite the contrary in fact.”

Beahm said that the outlook for any real overall growth in GDP is dependent upon increased consumer spending because economic headwinds from abroad, business capital spending, financial market turmoil and inventory accumulation are playing a big role to stymie growth without it. Gold and silver have already benefitted from this lack of growth and should continue to over the long-term.

“As we await first quarter GDP data and the inevitable revisions to forecasts for the second quarter and beyond, here is a sobering factoid – despite having some the smartest minds in Washington, in five of the last seven recessions the Fed was oblivious to them at the beginning of the quarter each began,” Beahm said. “With equities markets near all-time highs, yet fundamental economic data painting a less rosy picture, Blanchard sees precious metals that are still at attractive price levels with lots of upside.”

Beahm also said that the global attempt to re-energize economies using negative interest rates is going to fail investors, with the outlook for savers being particularly bleak.  “As governments consider the idea of negative rates, investors should realize there is a distinct possibility that this may be a stimulus effort of last resort as economies slow down. Precious metals are the right investment diversifier to protect wealth when inflation increases and the economy gets volatile,” Beahm said.

Could a gold revaluation happen? Would be wealth transformer

By David Smith*

As we move through 2016, the Horsemen of the geopolitical, economic, and social apocalypse are on the march.

China burns through its currency reserves as billions in yuan flee the mainland for safe harbor. Japan prints mountains of yen debt in an effort to create inflation – and thereby the conscious devaluation of its citizens’ purchasing power.

Saudi Arabia’s gamble of cutting oil prices to the bone in an effort to break the back of the shale oil industry is becoming so costly that it may have to sell a portion of mighty Aramco to outside investors, while keeping secret the amount of its U.S. debt.

The U.S. government holds an incomprehensible $19 trillion dollar debt, in a presidential election year where the programs offered by front-runners of both parties would increase that amount… by trillions more!

And to top it off, many nations – the U.S. included – are moving to implement a policy of negative interest rates (NIRP), where the bank charges you the customer for the privilege of holding a cash balance! Think about how corrosive NIRP would be. And while that’s going on, the government is actively working to promote inflation – in order to pay its social security and government pension obligations – while your purchasing power continues to decline.

The result of this policy is financial repression. A double sucker punch to your economic gut.

In Europe, NIRP is causing large corporations to hoard cash and buy gold rather than keep a large bank balance. In Japan, home safes, in which to store cash, are being purchased in record amounts, and demand for 100,000 yen (c. $1000) notes is going through the roof.

Central Banks Net Purchases of GoldSince 2010, central banks have become net buyers of gold

As the world’s governments come face to face with the prospect of currency collapse, something’s going to give. Confidence in (acceptance of) fiat money is literally all that holds things together.

Let a run out of a country’s paper money get underway – into anything of tangible value – and it’s GAME OVER. Even the ability of banks to suspend redemptions from your money market funds – instituted by federal decree last year – will prove to be nothing more than a metaphorical finger in the dike.

What is to be done? How can the central banks of countries around the globe, as they slip into a synchronized recession (or worse), dig themselves out of the approaching monetary-debt abyss without going through a systemic collapse first?

The Coming Revaluation of Gold

There is an answer… it’s written about occasionally, but scoffed at by virtually every “intellectual” and “economist” who has cared to give its backers the time of day.

That “answer” is born and nurtured through centuries of history in the crucible of economic need: There will be a revaluation in the price of the most powerful, effective, and durable store of value humankind has ever utilized – gold.

Talking heads and politicians like to say, “but there wouldn’t be enough gold for that!” Oh, yes there is… but only at the right price!

Gold revaluation (not monetization – where gold is redeemable in exchange for paper script as a monetary medium), would be instituted by central banks – perhaps first by the U.S. Federal Reserve, with others in tow…

Revaluing All Currencies against Gold Is as Simple as Eighth Grade Math

So far, the world’s major currencies have been taking turns devaluing against each other, to improve their country’s trade position in the global economy. It’s mathematically impossible to devalue all currencies at the same time, so as the “currency wars” intensify, the inevitable result is a spiraling race to the bottom.

Jim Rickards, in his recently-published seminal work, The New Case for Gold, shines a light on the way out for these dysfunctional entities, saying:

“..if you devalue it against gold – because gold is money. It’s not the kind of money that can be printed by a central bank… (but) with gold, everybody can devalue (their currencies) at once… It’s eighth grade math.”

In order to derive a per ounce dollar figure at which gold needs to be priced, in order to restore public confidence, and jumpstart inflation – central bank goals – Rickards suggests the following formula:

First take 40% of global money supply (M-I x 40%), then divide this figure by the official gold holdings of the world’s central banks (35,000 tonnes), and you get $10,000 an ounce as a realistic gold revaluation price. This action would stop deflation – a central bank’s worst nightmare – dead in its tracks. And they might not even have to reduce the money supply!

Other thinkers, including Antal Fekete and Hugo Salinas Price, have toyed with a gold figure of between $10,000 and $50,000. Price, who has been a tireless advocate for using the silver Libertad in Mexico as a circulating parallel currency, selects $20,000 as a realistic figure.

International Paper & Gold Reserves in Central Banks

Price says, “The discipline of gold as Reserves backing currency at a revalued price will restore order to a world that has refused to adopt the necessary discipline until forced to do so in the desperate situation now evolving, where there will be no other alternative but to accept the detested fiscal and financial discipline imposed by gold.”

Exchanging a “Paper Promise” for Real Money

The idea of backing a large portion of the floating debt that David Morgan of The Morgan Report has long referred to as “paper promises“, looks like it may be moving from a once far-fetched idea towards a place on center stage.

You may think that if a gold revaluation happens, you will be able to quickly go to the local coin shop and pick up a handful as soon as the possibility of a gold price rocket launch becomes obvious. But think again. Most likely announced on a Sunday evening, by Monday morning the precious metals supply would be gone. And mining stock share prices would go through the roof. Rickards notes:

“Gold will be in such short supply that only the central banks, giant hedge funds, and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980. The time to buy gold is now, before the price spikes and before supplies dry up.”

In summary, continue to buy and hold physical gold (and silver) as insurance first and for possible profit generation second. But now you have a third compelling reason – if gold revaluation does come to pass, those who have it will also have a personal financial game-changer of the first order!

 *

Two new articles on gold stocks posted by me on Seeking Alpha

I’ve posted two articles, one looking at Andean water problems affecting Kinross and potentially Barrick and Exeter, and another showing the huge rises in the share prices of the major gold miners, but demonstrating that they still nearly all remain hugely below the highs achieved in 2011 suggesting there’s still good upside potential yet.  To read click on the links below:

Water And Gold – Key Elements In Andean Projects

Massive Rises In Tier 1 Gold Stocks – Even Better Than the Juniors

China – still the heavy metal, gold and silver rock star

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

FH1

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets, China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

FH2

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

FH3

China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimisim in the red metal. Prices are up 6 percent month-to-date.

FH4

Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

FH5

For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

FH6

Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

FH7

New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

FH8

Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

FH9

Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currenices and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

FH10

Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.