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SWOT Analysis: It Could Be Time to Invest In Commodities

Commentaries & Views

Strengths

  • The best performing precious metal for the week was nearly a tie with platinum up 0.85 percent and silver with a gain of 0.70 percent, as gold, silver and platinum began to find support towards the close of the week. A Bloomberg survey this week shows that traders are split on their outlook for gold prices, with six bullish and four bearish.
  • Gold demand is rising in the world’s two biggest gold markets, India and China. In India, gold imports increased more than four-fold in April, reports Bloomberg, to 98.3 metric tons compared to 22.2 tons a year earlier, in anticipation of the wedding season. Meanwhile in China, gold demand may rise to the highest level in four years in 2017. Consumption could surpass 1,000 metric tons compared to 975 tons last year, driven by slowing property prices and tensions with North Korea.
  • Bank of China International led a $29 million capital raise for an online trading platform, G-banker. G-banker allows users to buy, sell, deposit and withdraw gold on its digital platform and mobile app.

Weaknesses

  • The worst performing precious metal for the week was palladium, off 1.05 percent as hedge funds cut their bullish bets the over the week. Gold is near an eight-week low amid comments from Federal Reserve Bank of Boston president Eric Rosengren. Rosengren warns that the economy may be overheating, and is calling for three more interest rate hikes this year.
  • BMI has cut its gold price forecast for 2017 to $1,250 per ounce. The firm sees lower demand for gold because of Emmanuel Macron’s win in the French presidential election, moderation in foreign policy rhetoric from the Trump administration, and weaker economic growth in China.
  • Investor Jim Rogers says that markets everywhere will start to correct this year, and says that he won’t buy more gold until it drops below $1,000. Rogers says that the equity markets will weaken after being strong for the past 12 months, and he expects the dollar to strengthen “no matter what Trump says.”

Opportunities

  • Gold open interest, the outstanding contracts on Comex futures, fell for a 10th straight session, the longest stretch since October 5, 2011. This a positive in that we may be coming to a near-term bottom with the reduced longs allowing room for positioning to build again. U.S. government data shows that consumer prices excluding food and energy were up 1.9 percent in April, the least since 2015. The relatively low inflation rate “suggests the Fed has less impetus to be aggressive in the way they remove monetary accommodation,” says Bart Melek of TD Securities. Also Joni Teves of UBS says, “we expect bargain-hunting to emerge and physical buying to strengthen should the market test $1,200/oz, paving the way for a recovery.”
  • A Goldman Sachs study concludes that it might be time to invest in commodities, during the rate hike cycle. The authors note that interest rate hiking cycles can be quantitatively measured, unlike economic cycles which require more qualitative judgement. The results of the study show that commodities outperformed during four separate rate hiking periods since 1988. During these periods, commodities were nearly double the performance of the stock market.
  • Argentina Mining Secretary Daniel Meilan says that a mining accord between federal and provincial legislation is expected by the end of the year. The new standardized set of rules will be signed by provincial governors and President Mauricio Macri in the next couple of months, and then be subject to congressional approval. The new code would be a positive development for mining companies in working in Argentina.

Threats

  • Bond traders are expecting the Fed to raise rates at its June meeting, placing odds of a hike at 80 percent. They are also seeing a September hike as more likely. However, looking at all 34 historical rate hikes since 1990, none occurred when five indicators were down. The five indicators, which are down this year, are crude oil prices, Treasury yields, and ratios of copper versus gold, industrial versus precious metals, and broad commodities versus Treasury prices.
  • For the first time since 2006, hedge funds and other speculators are net-short platinum. The platinum price is down 15 percent in the past 12 months, largely due to poor demand for diesel vehicles.

  • Moody’s Investors Service downgraded six large Canadian banks, due to concerns about consumer debt and high housing prices. Bloomberg also reports that “A run on deposits at alternative mortgage lender Home Capital Group Inc. has sparked concern over a broader slowdown in the nation’s real estate market.” In addition, hedge funds and other speculators increased their short positions to the highest level on record in the Canadian dollar, which is the worst-performing major currency this year.
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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