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SWOT Analysis: Is President Trump Making Gold Great Again?

Commentaries & Views

Strengths

  • The best performing metal this week was platinum, nearly flat but down 0.07 percent after rallying 2.60 percent on Friday. Swiss exports of gold rose 2.3 percent in June, reaching 117.6 tons, according to the Swiss Federal Customs Administration. The majority of those exports – 62 percent or 61.3 tons – went to China, while 21 percent or 18.9 tons went to India. Swiss imports of gold were down 5.3 percent to 173.6 tons. Furthermore, exchange-traded funds focused on commodities saw inflows during this past week, with precious metal ETFs leading the pack at $63.2 million of gains.

  • Although gold has seen a selloff in the past few days, Oversea-Chinese Banking Corp economist Barnabas Gan believes it is “likely overdone at this juncture,” reports Bloomberg. “Prices have moved lower on higher interest rate expectations following Fed Chair Powell’s comment amid a relatively positive growth outlook,” says Gan. Meanwhile, the U.S. Treasury reports that Russia is quickly liquidating U.S. dollar assets. Since the U.S. imposed heavier sanctions on Putin’s allies in April, the country has sold $81 billion worth of U.S. government debt, totally four-fifths of its cache.

  • On Monday, Lundin Mining announced its $1.4 billion all-cash offer to buy Nevsun Resources, a proposition which Nevsun’s CEO believes “ignores the fundamental value of Nevsun and its assets.” As a result, Nevsun advised its shareholders to not act on Lundin’s statement. In contrast, Sibanye approved to a gold and palladium streaming agreement with Wheaton Precious Metals that will grant them a $500 million upfront cash payment.

Weaknesses

  • The worst performing metal this week was palladium, down 4.74 percent likely on worries over the consideration of tariffs on automobiles which would likely hit car sales. As the bullion price slump continues to deepen, gold traders and analysts expressed a bearish outlook in Bloomberg’s weekly survey. Federal Reserve Chairman Jerome Powell announced that the central bank intends to continue raising borrowing costs, aiding the dollar and decreasing the yellow metal’s appeal. In light of this statement, the Bloomberg Dollar Spot Index rose to a two-week high, while gold-backed exchange-traded products fell to the lowest since March.

  • The U.S. dollar strengthened in the days following Powell’s optimistic assessment of the domestic economy. The growth held up according to the Beige Book economic report. Unexpectedly, jobless claims dropped by 8,000 in July, down to 207,000 claims according to the Labor Department. In light of this, the bullion price fell to its lowest in a year. Rising open interest and falling prices may result in increased short positions.

  • U.S. hedge fund Paulson Co. isn’t backing down in its fight against the management of Detour Gold Corp. On Thursday, Paulson Co. announced plans to call a special shareholder meeting, no later than July 28, where it will ask its shareholders to oust a majority of the company’s board of directors, reports the National Post. According to Bloomberg, Barrick Gold might be an undisclosed bidder for Detour Gold. People familiar with the matter say Barrick was asked to sign a confidentiality agreement alongside John Paulson to discuss this possibility. In other gold company news, Jake Klein, the executive chairman of Evolution Mining, says that the gold producer will consider using a strong cash position to add overseas assets to its Australian portfolio, reports the Financial Review. Evolution could have its sights Detour.

Opportunities

  • President Donald Trump may be making gold great again, according to Bloomberg. Trump criticized the Federal Reserve for raising interest rates and “taking away our big competitive edge.” The president believes America “should not be penalized because we are doing so well.” After Trump’s comments, gold futures headed for the biggest increase in over two weeks.

  • During Federal Reserve Chairman Jerome Powell’s testimony this week, he emphasized that the federal funds rate would rise “for now.” This careful choice of words suggests that the policy of raising rates a quarter point every quarter will not last, suggests Cornerstone Macro, as the bias is not toward faster rate hikes. “There is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger recession,” wrote the President of the Federal Reserve Back of Minneapolis.

  • While gold has fallen approximately $158 from its $1,369 peak in April, David Brady of Sprott Money is optimistic about the yellow metal. When comparing prior cases of gold falling over $95, Brady found that “it is reasonable to expect ‘at least’ a healthy bounce soon” according to the historical data. This outlook is supported by Direxion Daily Gold Miners Bull 3X Shares (NUGT), which had over 80 million shares valued at more than $1.8 billion trade this week. This is the largest volume the fund has ever seen.  We have now seen the gold stocks outperform gold bullion for the last 6 weeks and that mights have something to do with the very bullish buyer who took on the above mentioned trade.  On the chart below the price to cash flow (P/CF) ratio is charted for the NYSE Arca Gold Miners Index and we can see that this metric has based for about 6 years, as the miners have reduced debt and reigned in cost. The gold miners are trading at a P/CF of about 9.8 while the S&P 500 sports a 14.2 P/CF.  And now with President Trump expressing disdain for a stronger dollar, perhaps the pendulum will swing to the other extreme.

  • investors spike up trading for leveraged gold fund as metal falls

    gold's slump sent miners' valuation tumbling

Threats

  • If the Federal Open Market Committee (FOMC) raises rates at the pace suggested by June’s forecast and the long-term yield remains at present levels, the yield curve could invert sometime in late 2018, according to Federal Reserve Bank of St. Louis President James Bullard. “The simplest way to avoid yield curve inversion in the near term,” says Bullard, “is for policy makers to be cautious in raising the policy rate.”

  • Long delays in receiving environmental permits are costing mining companies millions. The U.S. relied completely on imports for 11 mineral commodities in 1984. By 2017, that number increased to 21. Domestic supplies are especially important now that the Trump administration aims to impose tariffs $34 billion worth of Chinese products, since China will likely respond in kind.

  • Due to the Fed hikes and souring sentiment towards emerging markets, the dollar may remain strong for some time reports senior commodity strategist Harry Tchilinguirian. As a result, gold’s average price forecast was cut to $1,250 per ounce for 2018 and $1,100 per ounce for 2019.

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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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