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SWOT Analysis: Will Gold Shine During Volatile Times?

Commentaries & Views

Strengths

  • The best performing metal this week was gold, down 1.26 percent.  China’s demand for gold jewelry rose 10 percent last year to around 700 metric tons due to increasing wealth of residents. China is the largest market for gold in the world.

  • Gold demand is also on the rise in India, the second largest consumer of gold, with purchases expected to rise to 800 metric tons, up from 727 tons last year.

  • Although gold might be on track for its largest weekly loss since December, gold bulls haven’t lost confidence; instead, they believe that the dollar’s advance won’t last. Gold trading was 133 percent above its 30-day average on Tuesday according to BullionVault, the largest online market for precious metals. John Sharma, an economist at National Australia Bank said, “The recent rout in equity markets should be supportive of gold, although not immediately.”

Weaknesses

  • The worst performing metal this week was palladium, down 6.84 percent.  According to the weekly Bloomberg survey, gold traders are more bearish than bullish on prices for the first week since early December. The yellow metal is on track for its second weekly drop amid rising interest rate fears. Gold ETF holdings decreased for five days straight while silver ETFs saw three straight days of additions.

  • Gold demand in the United Arab Emirates hit a 20-year low last year, its fourth consecutive annual decline, reports Bloomberg. Overall gold demand by central banks and ETFs is at an eight-year low, according to the World Gold Council survey, down 7 percent globally. South Africa, one of the top gold producing nations, saw its output fall the most in 10 months in December by 12.4 percent.

  • Credit Suisse is redeeming its note in the highly volatile XIV exchange-traded fund. The VelocityShares Daily Inverse VIX Short-Term ETN, known as XIV, dropped 14 percent on Monday then fell another 80 percent in late day trading.

Opportunities

  • Silver may be on the rise as the ratio between gold and silver is nearing a five-year high. If the ratio does reach its five-year average, the trend could reverse and silver could outperform gold, reports Bloomberg. The silver price might also rise due to improving global economic growth and the expanding middle class in China fueling demand for jewelry and solar panels.

  • Long-term dollar cycles

  • During periods of negative equity returns, gold has historically outperformed equities 79 percent of the time, according to Bank Credit Analyst.  Further, the group notes that in periods of rising volatility, gold outperformed 64 percent of the time. Goldman Sachs raised its price outlook for gold to $1,350 per ounce in three months and $1,450 in 12 months, up from $1,225 and $1,255, respectively. With inflation set to return, gold might see a boost as the yellow metal generally performs well during times of rising interest rates. Scotiabank reports that exposure to gold equities in general active portfolios is at the lowest since 2000, which presents an opportunity for buying of shares to match benchmarks.

  • Klondex Mines reported its year-end resource statement which was likely going to be a disappointment considering the company spent much of last year trying to bring the True North Mine up to commercial levels and get the Hollister Mine acquisition back into production too. Ultimately True North was put on care and maintenance.  Shutting down the distraction of True North should remove a cash drain from the company and allow management to focus on just their core assets in Nevada.  Like many gold companies, the Street tries to get the gold companies to grow by acquisitions because that typically leads to investment banking fees.   The capitulation downgrade by four analysts after the resource update is more of a looking backward view on what went wrong.  The Bloomberg Automation system creates an analysis of past analysts’ recommendations and often is the case you would have done much better by ignoring the timing of these recommendations.  For a 200,000 ounce gold producer in Nevada with a significant land package, which shows an array of “Fire Creek” like structures from a geophysical survey conducted on the land package northwest of the high-grade Fire Creek Mine (that only is valued at $278 million), there is a lot of room for improvement in 2018 either by focusing on the core properties or the subject of a takeover.

Threats

  • Veteran investor Jim Rogers believes that the next bear market will be the worst in his life, saying that “debt is everywhere, and it’s much, much higher now.” Chief investment strategist at BMO Capital Markets Brian Belski says that markets will hit rock bottom this coming Monday, which is the worst day of the week in terms of historical price performance, writes Bloomberg News. Blackstone Group LP President Tony James said this week that equity markets could fall as much as 20 percent this year adding that “every historic norm says that stocks are very, very fully valued.”

  • Investors are seeing more risks with owning longer-dated government debt in the form of bonds with term premiums surging in the Treasuries market, reports Bloomberg. The 10-year Treasury yield is at 2.85 percent, which is well below the 4.45 percent average during the decade beginning in 2000 or the 6.66 percent average the decade before that.

  • Randgold CEO Mark Bristow criticized governments and mining companies for what he calls “short-termism,” whereby the push is to extract as many minerals as possible, as fast as possible, from the ground. Bristow says this drives up production costs and doesn’t generate value for countries in the long term.

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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