Gold Trade Is Not Overcrowded Says UBS – The Holmes SWOT

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


  • The best performing precious metal for the week was gold, down slightly by 1.47 percent. Current market conditions make it the perfect time to invest in gold, according to Heather Ferguson, an analyst at Hargreaves Landsown. “There is a fixed amount of this precious metal in the world so central banks are not able to manipulate the gold market like they can with bonds and cash,” Ferguson explains. “In the current environment of quantitative easing and increasingly extreme monetary policy, gold is highly sought after.”
  • UBS says the gold trade is not overcrowded, according to a note this week.  The group believes that Federal Reserve policy decisions relative to the metal are not as straightforward in this environment where global yields are under pressure ahead of a rate hike.
  • Citigroup is also positive on the metal, raising its forecast for the second half of the year. The group cites elevated levels of U.S. election uncertainty and stickiness of ETF and hedge fund flows into gold products, reports Bloomberg.


  • The worst performing precious metal for the week was platinum with a loss of 3.77 percent. Platinum sold off when precious metals were bear raided on Wednesday, but did not get much of a bounce following Yellen’s speech on Friday.
  • “The past 48 hours have been an interesting period for gold…” writes Steven Knight of Blackwell Global. “As the metal has again seemingly fallen sharply following the liquidation of a $1.5 billion futures position over the course of 60 seconds.” According to Knight, given the amount of gold derivatives floating around, the fairness of the COMEX exchange likely needs an additional level of scrutiny. In addition, the timing of this “flash crash” could potentially be revealing.

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  • Goldcorp fell the most in six months, reports Bloomberg, on the back of retreating gold prices and the discovery of a leak at the company’s mine in Mexico. Less-than-stellar news was also reported from Kinross Gold Corp this week, as it suspended operations at a mine in Chile ahead of schedule due to a dispute involving water use (causing 300 workers at the Maricunga mine to be laid off as a result). Lastly, Orezone Gold Corp told investors on Monday that it will likely slash the gold resources at its Bombore project by a staggering 30 percent, reports the National Post.


  • When viewed against the aggregate balance sheet of the “big four” global central banks (Fed, ECB, BoJ and PBOC), the argument can be made if we view gold as a currency, that the metal is worth closer to $1,700 an ounce (versus the spot price of $1,326 an ounce USD), says Deutsche Bank. Over the same period that the aggregate central bank balance sheet expanded 300 percent, the bank continues, global above ground stocks grew by 19 percent in tonnage terms.
  • More than 500 million people are living in a climate of negative central-bank interest rates, according to a study by Standard & Poor’s cited by HSBC this week. This represents around 25 percent of global GDP and is a clear sign of “economic and policy desperation,” – a bullish factor for gold. Francisco Blanch of Bank of America agrees, stating that central banks “are very scared of hiking rates and that is a very good story for gold.”
  • “Although we have seen a significant rally in gold, I think investors should still consider an allocation to the precious metal,” Nick Peters, multi-asset investor at Fidelity, said. He continues by explaining that gold can function as a safe haven during times of market volatility and provide strong countervailing returns to equities.


  • The Reserve Bank announced today that sovereign gold bonds issued in February and March can be traded on stock exchanges starting Monday. Four tranches of the bonds have already been issued, with a fifth likely to be issued next month. Sovereign gold bonds provide an alternative to actual gold investing, offering investors a choice to buy bonds worth 2 grams of gold going up to a maximum of 500 grams.  The bonds are denominated in gold and pay 2.75 percent interest in physical gold.
  • Are the positive changes in the gold industry sustainable? This was the point of question from Gold Fields CEO Nick Holland during a keynote presentation on Monday, reports Holland points out that not only are companies cutting “fat,” but “muscle” as well. Stay-in-business capital (as a percent of operating expenditure) decreased from 46 percent in 2012 on a per ounce basis, to 26 percent in 2015. How can companies do this? “I believe that they have merely deferred capital that is going to come back, because if you want to sustain the business into the future, you need to spend the money,” Holland said. “That for me is a little bit of a concern.”  The Industry is going to play catch up, which could yield poor capital allocation decisions, particularly if the industry errors on the side of growing production ounces versus growing profitability.
  • In a note from BMO Private Bank this week, Jack Ablin points out that historically, options investors have been able to generate reasonable income by selling options to other investors looking for downside protection and upside opportunity. However, struggling yields have created an “outsized supply of yield-seeking options sellers who collectively outstrip buyers.”  The result is that implied volatility has declined. But just because yields are low, doesn’t mean that actual risk has gone away, the note continues.

Silver miner Coeur goes for more gold

Coeur Mining may be in the process of changing its status as a primary silver producer to that of a primary gold producer with the acquisition of the Wharf gold mine in South Dakota.  Latest post for  To read this and other articles on the world’s top mining and metals news and comment site click on 

Chicago headquartered primary silver miner, Coeur Mining, appears to be hedging its precious metals bets with the purchase, for $ 105 million, of the Wharf gold mine from a Goldcorp subsidiary.  While Wharf does produce some silver it is very definitely a primary gold  mine, and will stand alongside the company’s Kensington gold mine in Alaska as the its second such producer.

Wharf is an open pit gold mining operation located in the Black Hills of South Dakota, USA – an historic gold mining area – and close to the location of what for many years was the nation’s largest gold producer, the Homestake mine.  Wharf has been operating for 30 years and has measured and indicated reserves containing some 560,000 ounces of gold grading around 0.7 g/tonne (a halfway decent open pit grade by modern standards).  While this doesn’t suggest a long life operation (it is currently put at 7 years), it should be borne in mind that Wharf was developed those 30 years ago on the assumption of a 3-year mine life and has been going successfully ever since!

In a statement, Coeur states that it expects to produce 85,000 to 90,000 ounces of gold at Wharf in 2015.  It is a fairly low cost heap leach operation and Coeur reckons on all in sustaining costs of around $800-875 per gold ounce taking byproduct silver into account.  Coeur goes further in reckoning the mine will help increase the company’s EBITDA by over 30% and contribute to free cash flow from the start.  It also provides a 24% increase in the company’s total gold reserves.  As a lower cost operation than the company’s Kensington operation it should also help reduce Coeur’s overall consolidated unit costs.

In the Coeur statement, company CEO Mitchell Krebs comments “The acquisition of Wharf further establishes Coeur as a leading, growing producer of silver and gold in the Americas while improving our overall portfolio with strong cash flow generation in a low-risk jurisdiction. Wharf is a straightforward open-pit operation that has beenwell-run for over thirty years. Ongoing capital requirements are expected to be minimal, resulting in low expected all-in costs andsignificant expected free cash flow.  We believe this transaction will generate an attractive rate of return and is immediately accretive to cash flow and net asset value.”

Looking at the deal it appears Coeur is paying a fair price for the asset, but much will depend longer term on the company’s ability to prove up further reserves and extend mine life.  Judging by the mine’s history this may well be possible.

Overall the acquisition will have gold production account for about 60% of Coeur’s revenues. Up from a current figure of around 50% – perhaps changing the company’s status in the eyes of investors from a silver miner to a gold miner.  According to analysis by Cowen & Company, adding Wharf will increase the company’s 2015 gold production to 260,000 ounces or in terms of silver equivalent (if Coeur continues to be seen as a silver miner, to 34.14 million oz AgEq. Wharf’s low-cost relative to Kensington lowers the company’s gold-related cash costs to below $1,000/oz.

Overall the Cowen analysts view the acquisition as positive for Coeur, initially adding about $30 million a year in free cash flow, while requiring little in the way of capital expenditure at the current operation.