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SWOT Analysis: All Known ETF Gold Holdings Rise at Fastest Pace Since 2012

Strengths

  • Gold posted its sixth consecutive week of gains after rising $18.07 per ounce last week. Assets in the largest physical gold ETF erased this year’s decline as investors begin to realize the need for inflation protection as prices rise and the Fed vows to keep rates low for a considerable time. Not surprisingly, money managers increased their net long positions in gold for a fourth consecutive week, leading all known ETF gold holdings to rise at the fastest pace since at least 2012.
  • Christian Noyer, head of the French central bank and ECB governing board member, believes the global expansion of U.S. regulations will encourage diversification away from the U.S. dollar, threatening its reserve currency status. Noyer’s comments come as a result of the hefty fines the U.S. government is levying on French bank BNP Paribas after it was accused of dealings with Iran. Mr. Noyer added that trade between Europe and China does not need to use the U.S. dollar, especially now that China has agreed to the creation of an offshore renminbi clearing in Paris. Mr. Noyer concluded by stating the French central bank will now actively avoid U.S. dollar transactions in order to escape the application of U.S. regulations to its dealings.
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  • Northern Star shares rose as much as 15 percent in Australian trading as the miner announced it had surpassed its quarterly production guidance and had earned substantial margins at all its operations. Similarly, Coeur Mining reported a 48 percent increase in silver and a 13 percent increase in second quarter production at its Rochester Mine in Nevada. Lastly, Premier Gold confirmed a 69 percent increase to its open pit indicated resources at its Hardrock property in Ontario.


Weaknesses

  • British Columbia’s Fraser Institute’s Centre for Aboriginal Policy Studies warned that a recent Canadian Supreme Court ruling granting a group of 6 B.C. First Nations title to a large piece of land outside their reserves “will likely stunt economic development across Canada.” There are an estimated 200 First Nations bands in British Columbia, which raises concern among the mining community, that’s already been subject to numerous lengthy negotiations with these groups. In a related note, Australia’s Federal Court ruled in favor of the Ngadju people and against Gold Fields with regards to the St. Ives mining tenements. The Court sided with the Ngadju people after determining Gold Fields operations violate the native-title rights, to which Gold Fields objected, arguing it complied with its obligations at all times.
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  • Polyus Gold entered into a hedging contract to sell 310,000 ounces of gold over the next two years, which led to numerous headlines stating the gold sector would return to the era of gold hedging. However, data shows the hedge book volume stood at 87 tonnes as of the end of the first quarter, slightly up from the previous quarter, but miles away from the 3000 tonnes reached in the 1999 peak.
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  • Banro Corp. tumbled after announcing the throughput capacity at its Twangiza mine may not reach the expected 1.7 million tons design capacity. In addition, the miner said a plant at its Namoya operation will run below capacity as a result of technical setbacks. Banro’s troubles open the possibility of default and bankruptcy as the miner will struggle to repay a heavy debt load with a significant reduction in revenues.

Opportunities

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  • Renowned technical analyst Carter Worth, chief market technician at Sterne Agee, reports gold’s chart pattern is “extremely” bullish as prices continue to post higher lows. In addition, the 150-day moving average appears to have bottomed out as markets enter a period that historically has provided seasonal support for gold, silver, and related equities. With this background, it is not surprising that Goldman Sachs Asset Management, which runs India’s largest gold ETF, issued a note to investors explaining that the risk profile of the investment had changed since the issuer (i.e. Goldman Sachs) may not be able to return the physical gold. Dhirendra Kumar, CEO of Value Research states Goldman Sachs has probably lent the gold out, and will be unable to deliver physical gold for early redemptions.
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  • Dundee Precious Metals announced that Bulgarian authorities have moved the company’s Krumovgrad permitting application to the final step toward full permitting. The Krumovgrad deposit is a high quality open pit project with above average 4 gram per tonne ore, and potential to produce 80,000 ounces per year at very low cost. In addition, the company reported its recently refurbished Tsumeb smelter processed 60,332 tonnes of concentrate in the second quarter, a 23 percent improvement from the previous quarter.
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  • Lawrence Roulston, a renowned mining industry authority, referred to Klondex Mines in a recent interview with Streetwise Reports. In his interview, Roulston agrees that Klondex is on its way to developing very profitable underground operations, while warning that management is critical for advancing projects and adding value. However, he is not concerned with existing management at Klondex; instead, he praised their efforts to acquire Midas, which gave the company a clear short-term path to profitable production. As a matter of fact, Klondex has constantly sought to enhance its management team, and recently appointed Mike Isaak, ex-Barrick, Henry Follman, ex-Coeur, and Rosa Whisenand, ex-Barrick as high-caliber additions to its senior team.

Threats

  • Gold futures fell last week as analysts anticipate an earlier rise in U.S. interest rates. The Fed minutes released last week led analysts to revise their forecasts. Goldman Sachs, for example, now predicts increases to borrowing costs will take place in the third quarter of 2015, rather than its previous estimate the first quarter in 2016.
  • Rising interest rates, bond yields, and low inflation expectations are creating a perfect storm with strong headwinds for gold in the future, according to Morgan Stanley analyst Joel Crane. According to Crane, it is highly unlikely that gold will continue to rise in the coming quarters given current market conditions and the expected improvement going forward.
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  • BCA Commodity strategists have reiterated their underweight gold call within the commodity complex. According to BCA, the strength of the dollar and the stabilization of the U.S. equity risk premiums suggest gold will remain trendless in the second half of the year. Volatility in the aforementioned areas has been a key driver for gold in the past, thus their stabilization implies that it is unlikely gold prices will rise much further.

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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