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SWOT Analysis: A Tie In Best Performing Metals

Commentaries & Views

Strengths

  • The best performing precious metal for the week was pretty much a tie between gold, platinum and palladium with roughly a 0.50 percent gain.  Following the launch of a U.S. missile strike on Syria this week, gold rallied to its highest level in nearly five months, reports Bloomberg. Bullion was pushed back above its 200-day moving average, a level that analysts use to predict whether further gains will continue or stall.

  • Earlier in the week, the minutes from the Federal Reserve’s March meeting “boosted gold prices with the mention of the shrinking of the balance sheet,” said Jingyi Pan, a Singapore-based market strategist, reports Bloomberg. “This agenda could potentially conflict with the pace of rate hikes, therefore placing pressure on the dollar.” In addition, gold advanced after automobile manufacturers reported worse-than-expected U.S. sales for March.

  • BullionVault’s Gold Investor Index, measuring the balance of buyers against sellers, rose to 54.2 in March from 51.8 in February, reports Bloomberg. “Political risk continues to drive private investor demand for gold,” Adrian Ash, head of research at BullionVault, said in a report.

Weaknesses

  • The worst performing precious metal for the week was silver, with a fall of 1.30 percent.  Late Friday CFTC data showed that money managers actually increased their bullish opinion on silver to the highest level in more than eight months. Profit taking, post the morning surge in precious metals prices, late Friday pulled silver into a loss for the week.  Gold reserves in China’s central bank remained unchanged for the month of March, coming in at 59.24 million ounces, reports Bloomberg. This is the fifth straight month that gold reserves have remained unchanged.

  • Despite Goldman Sachs encouraging investors to have “patience” for the commodity market in the wake of a waning price rally, inflows into ETFs linked to raw materials have significantly plunged in recent weeks, reports Bloomberg. Goldman believes the pace of economic growth in China will drive raw-materials consumption. In a similar fashion, RBC Mining & Material Equity Team cut its precious metals recommendation to underweight from market weight for the second quarter, reports Bloomberg. It upgraded bulk commodities to overweight from market weight and fertilizers to market weight from underweight.

  • In Canaccord Genuity’s Precious Metals Note this week, the group says we may see potential NAV multiple compression in the sector. It notes margin compression, rising management compensation, declining IRR hurdle rates and rising operational and geopolitical risks as potential headwinds that could temper enthusiasm for gold producers.

Opportunities

  • In its U.S. Economics report this week, Macquarie Research says that demographic forces are intensifying, as the share of population 75+ begins to rise. Because of this, the group says the economy is confronting two headwinds, or “double trouble”: 1) a closing of the output gap and the end of slack and 2) unprecedented demographic change that has accumulated over the past seven years is now intensifying. They believe the Fed Funds may normalize at 1.5 to 1.75 percent and the 10-year Treasury yield at around 2.3 percent, well below consensus of 3 percent for Fed Funds and 3.5 percent for 10-year yields.  With CPI running at 2.7 percent, it is likely we will continue to see flat to negative real rates, thus supportive of gold. And in a note from BMI Research, the team says gold can be supported as the Fed is likely to raise rates only once more in 2017.

  • The technical team from Desjardins says that the gold price (COMEX) has substantial potential upside. The team notes that total known ETF holdings of gold have increased around 2 million ounces year-to-date, implying a gold price of $1,310 per ounce. Similarly, Comex paper claims to physical gold continue to soar to 45:1, while deliverable gold has contracted by 50 percent since the start of the year.

  • Zacks Investment Research highlights Klondex Mines in an article this week, calling the company an “off-the-radar potential winner” and saying it looks well positioned for a solid gain, but has been overlooked by investors lately. Klondex has seen estimates rise over the past month for the current fiscal year by about 22.2 percent, although that is not yet reflected in its price, as the stock lost 21.7 percent over the same time frame, Zacks writes. The company carries a Zacks Rank #2, a strong buy, further underscoring the potential for its outperformance. Another company with positive coverage this week is Rye Patch Gold, initiating a buy recommendation from George Topping from Industrial Alliance Securities. Topping predicts that Rye Patch will trade at 75 cents within a year, implying a potential 124 percent gain.

Threats

  • The Senate voted along party lines on Thursday to change the Supreme Court’s longstanding rules and effectively eliminate the filibuster for Supreme Court nominees, reports Bloomberg. Now it will only require 51 votes, not 60, to bring a nominee up for a confirmation vote. The Senate confirmed on Friday Judge Neil Gorsuch as the new Supreme Court Justice, restoring the generally conservative majority. Some commentators noted that this may embolden President Trump to now pick even more judges for the bench that are more divisive, since a simple majority will be all that is needed to confirm.  Similarly, Adam Posen, president of the Peterson Institute for International Economics, says that Trump is likely to pick a Fed chairman who is “very responsive to him.” 

  • In its Global Precious Metals Comment this week, UBS points out that European diesel share decline accelerated in March, supporting its view on platinum group metals (PGMs). Diesel share in the top five European auto markets declined, bringing the share of diesel vehicles to a multi-year low of 40.6 percent. The UBS Global Autos team expects this trend to accelerate further out, resulting in falling platinum demand.

  • European Union Diesel Trend Passenger Cars

  • Goldman Sachs writes this week, that after five years of operating cost deflation, we expect costs to start responding to the 40 percent rebound in metal prices witnessed since January 2016. Once earnings tailwinds, we believe these core cost drivers should now start putting upward pressure on the full spectrum of global cost curves, Goldman continues. Additionally, the group notes that not all costs can be controlled, explaining that around 85 percent of the copper industry’s opex improvement was driven by what it considers to be “uncontrollable costs.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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