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SWOT Analysis: Macroeconomic Backdrop Remains Positive for Precious Metals, says Metals Focus

Commentaries & Views

Strengths

  • The best performing precious metal for the week was silver up 1.07 percent. Precious metals rallied to mid-day highs on Friday as it was rumored North Korea will test a missile this weekend that is capable of reaching the U.S. West Coast.  Gold traders and analysts surveyed by Bloomberg on Thursday were equally split between bulls and bears this week, reports Bloomberg, after saying gold prices will go down three weeks in a row. According to data released by the Perth Mint this week, gold coin and minted bar sales increased to 46,415 ounces in September. This is up from sales of 23,130 ounces in August.

  • In the week ended September 28, inflows into U.S.-listed commodity ETFs totaled $644 million, reports Bloomberg, a 27-percent expansion. Precious-metals funds had $782 million of gains, the article continues, compared with $589 million the week prior.

  • Since Vladimir Putin went on a geopolitical offensive in the Ukraine in 2014, gold had its first annual gain in four years in 2016, writes Bloomberg, and is now on track for another gain in 2017. In addition, the Bank of Russia has more than doubled the pace of gold purchases, accounting for 38 percent of all gold purchased by central banks in the second quarter alone. According to the World Gold Council, this brings the share of bullion in Russia’s international reserves to the highest of Putin’s 17 years in power, the article continues.

Weaknesses

  • The worst performing precious metal for the week was palladium down 1.46 percent.  Palladium prices overtook platinum prices last week for the first time in 16 years, perhaps triggering some profit taking as the metal traded more than $25 lower to start the week.  On Monday, investors pulled the most money in more than two months out of the SPDR Gold Shares ETF, reports Bloomberg, meaning that perhaps they are “growing immune to the war of words between Donald Trump and Kim Jong Un.” Similarly, coin sales are shrinking in the U.S., down by two-thirds in the first nine months of the year from the same period in 2016, reports the U.S. Mint. Amid increasing odds that the Federal Reserve will hike interest rates by year-end, bullion has slumped more than 6 percent since trading at the highest in a year in early September, the article continues.

  • Bank of America only sees limited upside to gold into year-end. Michael Widmer, analyst with BofAML wrote in a report on October 2, “the Fed has recently reinforced intentions to normalize monetary policy and a rate hike in December is now increasingly priced in.” Brian Lan of Singapore-based GoldSilver Central adds that gold is also floundering on lack of support from Chinese markets during the week-long national holiday and dollar strength, reports Bloomberg.

  • BullionValut’s Gold Investor Index, which measures the balance of client buyers against sellers, is climbing back from a 14-month low in September, as prices touched a one-year high prior to retreating. Increasing expectations of a rate hike have also affected gold open interest, a tally of outstanding futures contracts, which dropped to the lowest in more than five weeks, reports Bloomberg. Another movement in the gold market is seen in the ratio of Comex paper claims to physical gold, which continues to creep higher at 93:1 currently, versus the average of 50:1 year-to-date. According to Desjardins, Comex-registered (deliverable) gold is now down to 588,000 troy ounces – down 62 percent since the beginning of the year.

Opportunities

  • Christopher Woods of CLSA, in a report titled “A Question of Contraction,” writes that the commencement of quantitative tightening (QT) represents the biggest risk to still presumably Wall Street correlated world stock markets. Woods says that gold remains “essential insurance” despite obvious risks posed by QT, and that the more the Fed tightens, the more likely it will trigger a renewed deflationary reality check. This could lead, again, to some form of unconventional monetary policy. It is the central banks’ (and the Fed’s) inability to exit from unconventional monetary policy, that the team at CLSA maintains its long-term bullish view on gold bullion. The ultimate price target remains at $4,200 an ounce, Woods continues.

  • According to Barclays, one question that the group has been asked by investors recently is whether mining companies are under-capitalizing their businesses. According to the Report dated October 5, Barclays writes, “We believe under-capitalization is not substantial on balance. But conditions are ripe for further capex increases given low capex/sales and D&A versus history, balance sheets are now fixed, dividends have been reinstated and commodity prices continue to be strong.” However, Barclays notes that capex upside is limited “by a paucity of growth projects that can be accelerated.” Also note, that according to Bloomberg Intelligence, for the first time in five years, capital spending for the BI global senior gold valuation peers is projected to increase in 2017, based on past 12-month trends and 2018 estimates.

  • In a report published on Tuesday, Metals Focus says that the macroeconomic backdrop remains positive for precious metals prices through to 2018, reports Bloomberg, along with expected weakening of the dollar. The firm stated that, “crucial to this view is that monetary policies are likely to remain accommodative.” Other news in the gold sector comes from a Paradigm Capital Report, outlining the group’s favorite explorers from the Beaver Creek Conference, specifically highlighting 12 companies. One positive sign was record attendance by corporate acquirers at the event, a sign that producers are hungrier. Paradigm Capital also notes the shortage of new discoveries, which makes the good ones all the more exceptional. The report goes on to explain that in the 1990-1999 decade, for every ounce produced globally, there was 1.4 ounces found in significant new greenfield projects. Then, from 2000 to 2009, the rate declined to 0.7 ounces per ounce produced. Since 2010, SNL estimates that only 0.3 ounces have been found. “Many of the ounces discovered, maybe one-third, are in inhospitable locations or are uneconomic, making the good ones all the more exceptional,” it reads.

Threats

  • David Doyle of Macquarie Research says the group is more optimistic about 2018 and beyond. The group is lifting its estimates for U.S. real GDP growth for 2018 by 50 basis points, while also increasing its estimates for 2019 through 2021 by 30 to 40 basis points. Doyle writes that Macquarie sees two to three interest rate hikes in 2018, and one to two hikes in 2019. In another note from Macro Strategy Partners this week, it reports that Congressional Republicans approved a 2018 fiscal spending blueprint to help advance the eventual tax bill. And although the market took the news positively, Fed officials have warned despite the delivery of a short-term boost, it could also bring high inflation and much higher debt – lowering growth even further.

  • If Western Australia moves forward with its proposed gold royalty rate hike, four of the biggest gold producers in Australia have warned they will likely close mines or direct investment dollars elsewhere, reports the Australian Financial Review. “If you get these royalty increases that wipe out all of your profits while you are trying to set up the long-term future of the mine you have to question, ‘do we really put that capital here or should we put it elsewhere’ and these are the sort of decisions that will get taken,” said Sandeep Biswas, chief executive of Newcrest Mining.

  • Jason Schenker, president and founder of Prestige Economics, told Bloomberg Television in an interview Monday that gold is facing numerous bearish factors. He noted a stronger dollar, U.S. stocks at all-time highs and signs of weakness in China’s economy. Looking at the political landscape in the U.S., advisers and allies of President Trump are floating the idea of Secretary of State Rex Tillerson being replaced by CIA Director Mike Pompeo, reports Bloomberg. On October 4, Tillerson actually vowed to stay in position following reports that he was near resigning.
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 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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