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SWOT Analysis: Gold Surges on Currency Volatility

Gold and gold stocks are on the move after the Swiss National bank removed its currency cap versus the euro last week. This highlights gold’s valuable role as a store of value when currency volatility destroys purchasing power as it has in many parts of the world over the past year.

As you can see in the chart below, gold in euros has rocketed higher.

Gold Price in Canadian Euro Terms

Similar moves can be witnessed in other countries’ currencies as well, such as the South African rand, the Japanese yen and the Canadian dollar.

Gold Price in South African Terms

Gold Price in Japanese Yen Terms

Gold Price in Canadian Dollar Terms

The Gold Market

Along with the move in gold, gold stocks are also responding. Our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX) crossed above their 50-day moving averages early this month. The 50-day moving average is a key trend indicator that many investors use to allocate capital.

Gold and Precious Metals Fund (USERX) Breaks Out

World Precious Minerals Fund (UNWPX) Breaks Out

Strengths

  • Gold traders are bullish for the seventh week in a row, citing the potential for stimulus in Europe along with speculation that the Federal Reserve will move slowly on raising rates. Moreover, one trader made a huge bullish bet earlier last week by purchasing 40,000 March 2015 SPDR Gold Shares ETF calls worth upwards of $10 million.
  • The Swiss National Bank’s surprise move to abandon the franc’s cap against the euro currency sent investors flocking to gold as a safe haven from currency swings. The SPDR Gold Shares ETF, the largest of the physically-backed ETFs, saw an inflow of almost 10 tonnes last Thursday, the largest single-day inflow since August 2012.
  • The World Gold Council signed a memorandum of understanding with the Shanghai Gold Exchange on a comprehensive strategic gold cooperation agreement. This further marks the shift in the gold market from West to East, as the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency. The agreement underpins the development of gold investment products within the Shanghai Free Trade Zone and the international trading of gold in the Chinese renminbi currency.

Weaknesses

  • Goldcorp announced it will take an impairment charge of up to $2.7 billion on its new Cerro Negro mine in Argentina. The company said this resulted from restrictions on importing goods and services into the country, converting Argentine pesos into U.S. dollars and high inflation.
  • U.S. retail sales fell the most in nearly a year last month, fueling speculation of weakness in the economy.
  • Average hourly earnings for all U.S. employees fell in December by the most since comparable records began in 2006, showing signs of slack in the labor market.

Opportunities

  • Sharps Pixley sees gold averaging $1,321 per ounce in 2015, citing the potential for investors to seek protection from currency debasement as well as a strong physical demand for the metal. Carter Worth of Sterne Agee said the New York gold futures drop in October-November was a “head fake,” since gold has been stabilizing as the U.S. dollar rallies.
  • Although the U.S. producer price index declined 0.3% percent month-over-month in December, the drop was almost entirely attributable to food and energy. Excluding these components, core producer prices actually rose 0.3 percent. This counters the deflationary pressures arguments.

Excluding Food and Energy Components, U.S. Producer Price Index Actually Rose

  • The Swiss franc soared as much as 38 percent on the news of its euro-cap rate abandonment, a currency move that normally takes years to accomplish. The markets interpreted the move as a preemptive action ahead of the European Central Bank’s QE next week. It also suggests that after six years of unprecedented intervention, central banks are losing control of markets and events. An unraveling of the markets would send investors rushing towards safe-haven assets such as gold.
  •  

Threats

  • Along with the euro-cap rate abandonment, the Swiss National Bank lowered the negative interest rate on sight deposits to -0.75 percent from a previous -0.25 percent, as well as moving the three-month Libor target to between -0.25 percent and -0.75 percent. This came as a complete surprise to the market as most observers forecasted the cap to remain in place for years.
  • Goldman Sachs reiterated its bearish outlook on gold, saying stronger U.S. growth should support higher real rates, thereby raising the opportunity cost of holding gold. Moreover, many of the fears that drove investors toward gold as a store of value, such as U.S. dollar debasement and high inflation, are now seen as moving in the opposite direction.
  • With the failure of rate hikes and substantial interventions to prop up the ruble, any further decline in the currency could force the Russian central bank to begin liquidating its gold reserves. As the major accumulator of bullion in recent years, this could put downward pressure on prices.

Total Annualized Returns as of 12/31/2014

 

One-Year

Five-Year

Ten-Year

Gross Expense Ratio

Expense Cap

Gold and Precious Metals Fund (USERX)

-14.00%

-15.67%

0.38%

2.15%

1.90%

World precious Minerals Fund (UNWPX)

-16.52%

-18.79%

-2.57%

1.86%

N/A

Expense ratios as stated in the most recent prospectus. The expense ratio after waivers is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

For the week, spot gold closed at $1,278.85 up $56.33 per ounce, or 4.61 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, gained 6.93 percent. The U.S. Trade-Weighted Dollar Index gained 0.77 percent for the week.

 

 

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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