Frank Holmes

SWOT Analysis: Upside Momentum for Gold Looks Strong in Second Half of the Year

Strengths

  • The Shanghai Gold Exchange is expected to receive approval from its central bank for a yuan-denominated gold fix soon, according to Reuters.  If the yuan fix takes off, China could draw buyers in the mainland and foreign suppliers to pay the local price, making the London fix less relevant in the world’s biggest bullion market. Additionally, the Shanghai Gold Exchange is in discussions with the CME Group about listing each other’s contracts on their respective exchanges, according to the exchange’s vice-president.
  • Trading volume on the Shanghai Gold Exchange for the benchmark contract soared this week to the highest on record, according to data on Bloomberg, going back to 2002.  The Shanghai Composite Index dropped more than 10 percent in the last two trading days of this week and is down nearly 20 percent from its highs.
  • United States Mint bullion sales have been further propelled higher this week. With several days more remaining in June, gold sales at 59,000 ounces are the highest since January and silver sales at 2.5 million ounces are the strongest since April.

Weaknesses

  • After gold rallied to above $1,200 last week on the softer Fed outlook on interest rates, gold prices fell for the first four trading sessions and only moved slightly higher on Friday.  
  • South Africa’s Chamber of Mines said it gave workers a 10 percent pay raise in 2013 when the actual increase only amounted to 8 percent, according to the National Union of Mineworkers General Secretary. The “mistake” has eroded trust in the South African wage negotiations.
  • Midway Gold filed for bankruptcy protection after suspending mining activities at Pan Gold Mine in Nevada. The company listed assets of $82.5 million and debt of $55.9 million as of June 21 in Chapter 11 documents. The company could owe creditors as much as $500 million.

Opportunities

  • Standard Chartered announced bullion could rise to $1,300 per ounce by year end as the market begins to contemplate the impact of a Fed rate cycle that’s likely to be far more gradual and peak far earlier than normal tightening cycles. Furthermore, Credit Suisse said gold demand in Asia is likely to be more robust in Q3 and Q4 due to increased physical gold demand from Asia, central bank purchases, and declining supply that should offset the stronger dollar. Lastly, Barclays sees Q3 as bullion’s weakest, given rate hike expectations and a weak price floor. They see a mild recovery thereafter.
  • Incrementum AG published their ninth rendition of “In Gold we Trust 2015” this past week. The publication provides an encompassing analysis of the global gold market and its relationship to governmental monetary and debt policies around the world.  While we believe gold has a long-term role in a portfolio for diversification, we are now approaching what could be one of the most opportune times of the year to add gold and/or silver to your asset mix as July is historically a low point in the calendar year, in terms of prices.

Upside Momentum Looks Strong in Second Half of the Year
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  • Gold demand in China may get a significant boost if the country’s stock rally fades. The Shanghai Composite Index has plunged 20 percent over the last couple of weeks, the fastest pace among global equity gauges and the most since 2008, amid concern valuations were unsustainable.  About $1.3 trillion was wiped off mainland Chinese equities last week, more than the value of Australia’s entire stock market. Also, Fidelity’s Ian Spreadbury recommended owning gold, silver, and physical cash saying that there is no liquidity left and the idea of efficient markets facilitating reliable price discovery is an anachronism. He said this is the result of high frequency trading, an ineffective post-crisis regulatory regime, and central banks that have commandeered sovereign debt markets.

Threats

  • A study by GMP Securities suggests the cost cutting programs entered into by most major and mid-tier gold mining companies may have largely gone as far as they can go. If metal prices don’t recover it could prove to be difficult to attain further growth in profit margins for the miners.
  • Goldman Sachs and Societe General fear that contagion may be a bigger issue than people anticipate should Greece exit the eurozone. They highlight that the damage resulting from a breaking of the integrity of the euro would not be fixed by monetary policy alone. The failure to keep Greece in the euro would demonstrate the limitations of the growth and fiscal arrangements of the current euro area policy framework, offer a precedent to other governments and their oppositions, and crystallize the convertibility risk on all euro area securities.
  • Sibanye Gold spoke out that the anticipated electricity price hikes, as much as 25 percent, by Eskom in South Africa will hit the mining industry very hard.  Sibanye may be forced to close five of the company’s 18 shafts, effecting likely around 8,000 direct and indirect jobs.  Undoubtedly, if such a tariff rate is put in force, all the miners in South Africa would be forced to make some difficult decisions regarding the operation of their mines.

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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