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SWOT Analysis: Gold’s Appeal as a Safe Haven Rewards Investors During Selloff

Strengths

  • Standing at just over $2 billion in August, gold imports in India surged 450 percent year-over-year in September to reach $3.75 billion. India’s trade deficit widened the most in 18 months as a result. The surge in demand was triggered by the festival season in the country.
  • Concern over global growth peaked this week causing a selloff in global equities and spurring gold purchases. The precious metal’s appeal as a safe haven rewarded gold investors this week.
  • According to Bloomberg, gold traders are the most bullish they’ve been in 10 weeks. Seventeen out of 27 traders hold a bullish outlook on gold, citing global growth fears as justification.

Weaknesses

  • Platinum declined to a level below gold for the first time since April 2013 this week. The precious metal is widely used for automotive catalytic converters. With roughly 50 percent of usage related to industrial production, fears of a global growth slowdown are weighing on platinum.
  • Senior gold-producing companies are cutting costs amid declining bullion prices.  However, despite cost cutting, third-quarter earnings are expected decline by 27 percent. Silver producers are estimated to report a 33-percent decline in earnings per share due to falling silver prices.
  • The U.S. 5-year breakeven inflation rate reached its lowest point since 2011 on Wednesday. Deflationary fears appear to have peaked however, as yields have shown a significant bounce to the upside since Thursday. As global growth slowdown fears seem overplayed, and the European Central Bank (ECB) prepares for its asset-backed purchasing program, it seems likely that inflation will rebound.

GOLD-US-Five-Year-Breakeven-Inflation-Rate-Reveals-Deflation-Fears-10172014

Opportunities

  • Despite the bounce in gold prices this week, silver remains subdued. The relative lag of silver to gold is unusual, implying silver prices may rally soon if gold stays positive.
  • The Market Vectors Global Junior Gold Miners Index will now allow larger index companies to qualify for the index. The buffer zone used in the index methodology has been expanded to include companies ranking between 75 and 100 percent of the eligible universe, as opposed to the current range of 80 and 100 percent.
  • The ECB announced this week that it will begin its asset-backed purchasing program within days in order to respond to declining global growth. Stimulus out of the eurozone should help relieve the deflationary pressures permeating through the region and consequentially the rest of the world.

Threats

  • Switzerland’s National Bank is moving to block the motion that would require it to hold at least 20 percent of its assets in gold. The “Save our Swiss Gold” initiative should be voted down according to the Swiss Federal Council, as well as both houses of parliament.
  • Barclay’s stated in a report that it expects the gold rally to be short-lived. They argue that macroeconomic headwinds will outweigh the increased demand from gold in India, leading to an overall decline in gold prices in the future.
  • Natixis Commodities Research set a gold price forecast for $1,170 per ounce in 2015. On top of the predication for a decline in the price of gold, Natixis expects the current outflows out of gold exchange-traded products (ETPs) to continue into the new year.

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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