Frank Holmes

SWOT Analysis: China Gold Association Believes Gold Demand Will Keep Expanding

  • Silver was the best-performing precious metal for the week with a gain of 5.05 percent.  Perhaps the brewing controversy over the most recent price fixing accusations, discussed below under “Threats,” is starting to draw more eyes upon this process and the banks accused of manipulating the price will have to back away.
  • The U.S. dollar is having a rough ride, reports Bloomberg this week. The currency dropped following a report showing service industries expanded in January at the slowest pace since 2014, a sign that manufacturing weakness is “starting to creep into the rest of the U.S. economy.” Even New York Fed governor William Dudley warned of “significant consequences” for the economy if the dollar were to strengthen further, according to MacroStrategy.
  • Gold rallied early in the week after data showed a further contraction in China’s manufacturing data, adding to the case for haven assets, reports Bloomberg News. In fact, according to a report from the Perth Mint, gold sales rose to 47,759 ounces from last month. The sales for January climbed 250 times the amount of sales in December. January sales reached 124,000 ounces, up 53 percent since last January.
  • Wedding season demand has also driven this uptrend in gold sales.

Weaknesses

  • The worst-performing precious metal for the week was again - palladium.  Perhaps markets are expecting car sales to not be as strong this year, due to the recent weak economic data.
  • Primero Mining Corporation closed the week down 35.20 percent. The precious metal producer and its advisers believe that a legal claim made by the Mexican Tax Authorities (SAT) is without precedent, according to Canaccord Genuity. Primero reported that its Mexican subsidiary received a legal claim from the SAT aiming to nullify a 2012 APA (Advance Pricing Agreement) ruling. The ruling allowed the company to pay taxes on realized silver prices as opposed to spot silver prices between 2010 and 2014.
  • Bloomberg reports that Indian gold imports in January could drop 25 percent from December, along with inbound shipments falling to 80 tons in January (from 106 tons the prior month). Unofficial gold trade in the country has also been boosted, according to the Times of India. Rather than promote transparency, a new rule to force buyers of high-value jewelry to disclose their tax code, has actually increased unofficial trading. Looking to Venezuela’s gold market, Reuters reports that the country’s central bank has begun talks with Deutsche Bank AG, noting that the talks are focused on gold swaps to improve the liquidity of its foreign reserves.

Opportunities

  • Assets in gold-backed exchange-traded products have jumped 4.9 percent in the past month, reports Bloomberg News, making this the longest “fund-buying run in three years.” Traders are betting on less than a 50 percent chance of a rate increase by the Federal Reserve this year (gold tends to fare well when rates are low), yet another sign pointing to the metal’s resilience this year.

Investors Move Back Into Gold ETFs

  • The China Gold Association believes the country’s gold demand will keep expanding as investors seek safe-haven assets and jewelry buying increases.  Consumption in China climbed 3.7 percent in 2015 from a year earlier, while gold output in 2015 was down 0.4 percent. As Lawrie Williams points out, this means China’s gold output faltered for the first time in 20 years.  China’s flatting production profile seems to reinforce the notion of “peak gold production” may be upon us.
  • Lake Shore Gold jumped nearly 10 percent on Friday due to an Internet posting on rumors that the company is in late-stage talks to be acquired by Tahoe Resources.  Earlier this week Lakeshore confirmed the expansion of its high-grade Whitney mineralization project.  The deal could bring a politically safe Canadian asset into Tahoe Resources’ fold.  In addition, the Lake Shore assets are surrounded by Goldcorp properties that might not be core to Goldcorp. Thus perhaps there is a bigger opportunity for Tahoe to later strike a friendly deal with Goldcorp where Tahoe acquires a strategic position in the Timmons Gold Camp and Goldcorp sells non-core assets and pays down debt.   Integra Gold also made headlines this week after the company was rated a “strong buy” by Raymond James. Equity analyst David Sadowski placed Integra’s 12-month target price at C$0.70 per share.

Threats

  • According to a Sharps Pixley article this week, 10 times in the last six months the silver price has been “fixed” outside the trading range of the spot price for that day, which is making some scratch their heads. The LBMA Silver Price, or the new silver fix, had the spot markets “fixed” last Thursday at $13.58, yet silver traded between $14.40 and $14.10 in the spot markets. As ZeroHedge points out, this “hugely controversial silver price benchmark was set some 6 percent below the prevailing spot price on Thursday.”
  • The German government is considering introducing a limit of 5,000 euros (or in U.S. dollars, $5,450) on cash transactions, reports the New York Times, in an effort to combat money laundering and the financing of terrorism. ZeroHedge writes that these cash controls come at a “rather convenient time for policy makers in Europe,” pointing out that rates are already sitting at -0.30 percent (and likely to be cut an additional 10 basis points in March). The article continues on to state that “in a cashless society with a government-managed digital currency there is no effective lower bound” to how governments could control your wealth.
  • Bloomberg Business reports that a handful of companies that have dominated nearly every kind of raw-material business in Japan for decades, could take as much as $13 billion in charges during the current fiscal year. General trading houses, or “sogo shosha,” that supply everything from gasoline to noodles, have been squeezed by the global commodity slump. With raw material prices falling, reports Bloomberg, the focus has shifted to other businesses.

By Frank Holmes

 

 

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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