Will Gold Find A Better Environment to Move Higher? – The Holmes Gold SWOT

Strengths

  • The best-performing precious metal for the week was palladium, down slightly by 0.41 percent. In an overall down week for the precious metals sector, palladium remained flattish.
  • Following the release of disappointing U.S. economic data Friday morning, which reduces the chance of a rate hike next week, gold rebounded from near two-week lows (although still on track for its first weekly loss in three), reports Reuters. “Once past the FOMC, gold may find a better environment to move higher,” said Michael Armbruster, principal and co-founder at Altavest. “In the big picture, even if the Fed raises rates twice more a total of 50 [basis points], real interest rates will remain negative—a very bullish environment for gold.”
  • Copper posted the biggest gain in nearly three months, reports Bloomberg, as strong economic data from China fueled speculation that demand will strengthen in the country. Factory output, investment and retail sales all exceeded analyst estimates in the Asian nation. On the London Metals Exchange copper for delivery in three months rose 2.6 percent mid-week, the biggest increase since June 15, the article continues.

Weaknesses

  • The worst-performing precious metal for the week was platinum, down 4.18 percent. According to Bloomberg, platinum experienced a seventh week of losses (the longest run since 2013). John Meyer, an analyst at SP Angel Corporate Finance LLP, says investors are losing interest in both platinum and palladium on concern that the popularity of electric cars, which use less platinum and palladium than gasoline-fueled cars, will cut into demand.
  • Reports that U.S. inflation pressures are rising, with a rise in monthly inflation seeing its biggest jump since February, sent the U.S. dollar higher on Friday. Gold, which has an inverse relationship with the greenback, drifted lower on the news. “This continues the tennis match between bulls and bears, hawks and doves over whether or not the Fed will raise interest rates next week,” said Colin Cieszynski, chief market strategist at CMBC Markets.
  • Although 2016 started with a bang for commodities, the year could end with a whimper, reports Bloomberg. The Bloomberg Commodity Index is heading for a third-quarter slump after posting consecutive gains for the first two periods, the article continues. Investors pulled $791 million out of ETFs tracking commodities over the past month and hedge funds have cut their combined wagers on a rally for raw materials in nine of the past 11 weeks.

Opportunities

  • David Mazza, head of ETF and mutual fund research at State Street Global, doesn’t believe a rate hike in the U.S. will spoil investors’ appetite for gold, reports Bloomberg. “We’re still going to be in an environment where rates in the U.S. are still very low,” Mazza said. In fact, holdings in gold-backed ETFs are heading for a third quarterly gain, the longest streak since 2012, despite the rising odds of a rate increase, according to data compiled by Bloomberg.
  • Barrick Gold Corp. has turned to tech giant Cisco Systems Inc. to help digitize its global mining operations, reports Bloomberg. “We mean to create value and push the boundaries of our industry in entirely new ways,” Barrick Executive Chair John Thornton said. A flow of real-time data should help cut costs and wring additional value out of its existing mines. As seen in the chart below, Barrick’s debt is down 43 percent to $9 billion from a 2013 peak, with most of the heavy lifting done by Thornton, Bloomberg continues.

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  • Klondex Mines announced this week its decision to put its underground True North Gold Mine in Manitoba, Canada, back into full production, reports Mining.com. This will be Klondex’s third operational mine and President and CEO Paul Huet sees it delivering “significant value” to shareholders. The positive production decisions estimates annual production at True North at 45,000 to 65,000 ounces of gold.

Threats

  • With the Federal Reserve’s interest rate decision due next week, some gold investors are getting a bit nervous, reports Bloomberg. Cohen & Steers Capital Management, for example, was overweight in the yellow metal until last week when it decided to pare its gold allocation. In fact, over the past week, investors pulled $698 million from SPDR Gold Shares (taking holdings to the lowest since June), the article continues.
  • Barrick Gold Corp. announced temporary suspension of operations at its Veladero mine in Argentina on Thursday, pending further inspections of the mine’s heap leach area. A new spill was confirmed in the area, but Barrick reported that no solution from the damaged pipe had reached any water diversion channels or watercourses. The impacted area has now been remediated. The company does not expect the incident to have a material effect on its 2016 operating guidance for the mine.
  • In South Africa, one of the biggest producers of gold, 60 mining deaths this year (through August) were reported, according to the Chamber of Mines, up 20 percent from the same period last year. Finding minerals is becoming more and more deadly in the country, reports Bloomberg. The annual tally is heading for its first increase in nine years, the biggest in at least two decades.

 

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Gold Has Room to Run – The Holmes SWOT Analysis

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

Strengths

  • The best performing precious metal for the week was gold; with a 1.97 percent rise in what was a volatile week of trading. As gold prices head for a third straight weekly gain, reports Bloomberg, at least one measure shows that bullion could have even further to run. Open interest, which is a tally of contracts in Comex futures, reached a one-month high as traders remain bullish.
  • Investors continue to add money to precious metal funds, even as the gold rally shows signs of slowing, reports Bloomberg. Assets in gold-backed ETFs have risen every day in June due to the increased geopolitical stress caused by the U.K. referendum. Similarly, at Sharps Pixley, a gold showroom in London’s Mayfair district, the demand for bullion bars and coins is rising, as investors seek a safe haven metal in case of a British exit from the EU.
  • Gold jumped this week as fewer Federal Reserve officials expect the central bank to hike interest rates more than once this year. According to Bloomberg, projections from the FOMC show the number of officials who see just one increase rose to six from one in the previous forecasting round in March.

Weaknesses

  • The worst performing precious metal for the week was platinum; with a loss of 2.18 percent. The platinum price to gold price ratio has hit its lowest point since 1982. Historically, platinum has traded at a premium to gold. While platinum may look like a bargain relative to gold, the future acceptance of electric cars could be a game changer.
  • On Thursday, the British pound erased losses against the U.S. dollar following the killing of a U.K. lawmaker, reports Bloomberg. The tragedy fueled speculation that the nation’s voters will be more likely to favor remaining in the EU in next week’s referendum, continues the article, sending gold down from near two-year highs after it surged post the FOMC meeting.
  • Sabina Gold and Silver Corp. received a report from the Nunavut Impact Review Board (NIRB) this week relating to its Back River Gold Project in Nunavut, Canada. In the report, the NIRB recommended that the project not proceed to the licensing and permitting regulatory phase, noting the need for further consideration concerning caribou and climate change. Sabina’s share price was down 38 percent for the week.

Opportunities

  • On Sunday, George Ogilvie resigned as CEO from Kirkland Lake Gold and won’t stand for election as a director at the company’s annual meeting, reports the Canadian Press. Former CEO of Lake Shore Gold, Anthony Makuch, will step in as CEO. We have great respect for George Ogilvie as he was the catalyst that turned Kirkland Lake around. He accepted the CEO position in November of 2013, and as you can see in the chart below, during Ogilvie’s time at Kirkland, you would have never known this was a gold company that he was managing. Under Ogilvie’s tenure the share price of Kirkland Lake rose 262.46 percent while the S&P/TSX Global Gold Index only gained 41.29 percent. The gains for the index really only came over the last six months when the gold price started to rise. We wish George further successes in his future endeavors.

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  • Brexit or not, James Steel of HSBC believes that gold can still rise to $1,400 an ounce, Barron’s reports. If Britain chooses to stay, Steel says the precious metal is likely to fall, but to no more than $1,220 an ounce, or a 7 percent downside. And if the Brexit campaign succeeds? According to a Bloomberg survey of 22 traders and analysts, gold prices could rise to the highest in more than two years – potentially reaching $1,350 an ounce within a week of the vote.
  • Under new proposed regulations, India is looking to open up mining of gems and precious metals, reports Bloomberg, in order to cut reliance on imports. Mines Secretary Balvinder Kumar said in an interview that the country is set to auction about 50 blocks for diamond and gold exploration in the fiscal year starting April 1, aided by changes in the national mineral exploration policy to be unveiled by month end. Historically, it has been extremely difficult for any company to move a mining project forward. Rio Tinto Group has been trying to get approvals for its Bunder diamond mine site since 2004. If India’s new mineral policies provide an economic path to production, then watch this space for potential new discoveries in the future.

Threats

  • The current ratio between gold and copper is showing a “recession-era fear level,” Bloomberg reports. Gold jumped to the most expensive relative to copper since 2009 this week. The price of copper (seen as an economic bellwether), has slumped over Brexit worries, while the low interest rate outlook has fueled demand for bullion – driving the ratio between the two farther apart
  • India’s monsoon season could be reduced by the receding El Nino, reports Bloomberg Intelligence, leading to a poor harvest in the country, and thus, rising food prices. This could lead the world’s largest consumer of silver, and second largest in gold, to spend more on food this year than jewelry, ultimately undermining demand for precious metals in the country.
  • Jeff Rhodes, CEO of Zee Gold in Dubai, added color to India’s situation this week during an interview on Bloomberg TV. Rhodes said there is no demand for the metal now in India due to the monsoon, adding that kilo bars are even selling at a $30 discount in the country. The price of gold, according to Rhodes, could fall to $1,100 an ounce if the U.K. votes to stay in the EU, but has the potential to climb to $1,600 an ounce if the U.K. leaves.