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SWOT Analysis: China is Seeking to Obtain More Influence Over Gold Prices

Strengths

  • China officially opened the Shanghai Free Gold Exchange on Thursday. By giving foreign investors direct access to its gold market for the first time, China is seeking to obtain more influence over prices while simultaneously boosting the global use of its currency, the yuan. In addition to the deregulation of the gold market in Shanghai, Hong Kong’s Chinese Gold and Silver Exchange Society was given permission to set up a precious metals vault in Shenzhen this week. The continued deregulation of the gold market by the world’s largest consumer is a huge boost to the precious metal.
  • China is planning on boosting its gold reserves. The country’s reserves, a mere 1.1 percent of total reserves, have plenty of room to grow if when compared to nations such as the United States and Germany, which hold roughly 70 percent of their reserves as gold. The increase in gold demand from Chinese central bank purchases should place upward pressure on gold prices.
  • In the first eight months of this year, Shanghai imported $15.98 billion of gold, a staggering indicator of demand in China. Furthermore, last Thursday, two tonnes of gold was imported into Shanghai, indicating that gold imports into the city are not slowing down.

Weaknesses

  • Gold traders have become the most bearish in three months, according to a survey from Bloomberg. The poor market sentiment is the result of the Federal Reserve lifting its median estimate for the Federal Funds rate by the end of 2015.
  • Despite it historically being the best month for gold, September has shown nothing but declining gold prices. The typical increase in demand from India due to the festival season appears to be overshadowed by the extraordinary strength of the U.S. dollar and its negative effect on gold prices.
  • The ratio between gold prices and global equities, as measured by the MSCI ACWI, has declined to its lowest level since September 2008. The low point is due to the unusual headwinds for gold as of late and the continued strength of equities. It will be interesting to see if the strength in equities continues in the near future.

Opportunities

  • Despite overall market sentiment favoring equities, George Soros has decided to bet on gold. Soros increased his bearish position in equities by 605 percent last quarter. The world famous investor did double down his position on gold mining ETFs, while also adding many gold companies.
  • Klondex Mines remains significantly undervalued relative to its peers. Despite its higher profit margins and similar revenue production, the company’s enterprise value is much lower than that of its peers. In addition to the company’s superior margins, Klondex recently identified a third mineralized structure at its Fire Creek mine, with grades exceeding one ounce per tonne.  A new resource estimate for Fire Creek will certainly add to the company’s resource base at year end. The success of Klondex has been noticed by some, as it is to be officially included in the S&P/TSX SmallCap Index.

  • Teranga Gold Corp. reported that the first ore obtained from Masato confirms high-grade mineralization, a sign of the project’s increasing profitability. Furthermore, insiders at Teranga Gold, including the company’s chairman, recently purchased more than 600,000 shares. Insider buying typically foreshadows an expected increase in stock prices.  Teranga was also added to the Market Vectors Junior Gold Miners Index as of close on Friday.

Threats

  • The recent record performance of the S&P 500 is painting an incomplete picture of current market conditions. Roughly 47 percent and 40 percent of stocks in the Nasdaq Composite (CCMP) Index and the Russell 2000 Index, respectively, are experiencing a bear market. The divergence between large-cap and small-cap stocks points out significant threats in the market, painting a much darker picture for future performance.
  • Deutsche Bank notes that, due to the recent poor performance of gold, households in India will begin to move toward financial investments and away from physical investments. The bank sees the attractiveness of financial savings through bank deposits, mutual funds and insurance increasing in the future.
  • Higher bond yields and the continued strength of the dollar, continue to create headwinds for gold. Although the dollar is in store for a reversal soon, higher yields could persist as investors continue to consider the coming rate rises.

Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

 

 

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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