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SWOT Analysis: Current Real Rates in the U.S. Have Historically Coincided With $1,400 Gold Prices, says CIBC World Markets

Strengths

  • The paradigm has shifted as ETF holdings posted record growth and gold fell. Gold posted its largest daily drop of the year on Monday, after concerns of financial stress in Portugal eased, and investors awaited Federal Reserve Chairwoman Janet Yellen’s semi-annual monetary policy testimony to the Senate. The big positive for the gold market came when ETF investors rushed to buy as gold dropped. On Monday as prices tumbled, assets in the SPDR Gold Bullion ETF rose to 808.73 tonnes, thus setting the single largest daily gain since August 2011. Commerzbank analysts stated that “ETF investors clearly took advantage of the reduced price of gold as an attractive opportunity to buy.”
  • Indian gold imports surged 65 percent in June after the central bank allowed more banks and traders to buy bullion overseas. The news is encouraging as it occurred during a period when the investors speculated import restrictions could be reduced, which would have had larger buyers deferring purchases in anticipation of a possible import tax reduction. More importantly, monthly gold consumption in China and India represents the largest source of demand for bullion; thus, any increase, albeit small, can push the gold supply and demand further in favor of higher prices.

  • On Monday, BCA Research announced that its long energy, short gold miners pair trade was unwound, triggering its stop-loss level. The news underpins a recurrent theme in this year’s gold space: short gold trades are getting squeezed. BCA stated that while its growth-biased strategy remains intact, recent data has shown growth slippage outside the U.S., which could add support to gold and gold miners if reflationary forces pick up.

Weaknesses

  • According to a recent Mineweb article, big investment banks including JP Morgan in particular, have reportedly been building short positions in gold and silver to a level not seen since the big gold price smash down of April 2013. Not surprisingly, this week we saw the return of last year’s massive gold futures dumps into the market. Sharps Pixley reported that a $2.3 billion notional trade was dumped into the market early on Tuesday, minutes before Janet Yellen’s semi-annual testimony to the Senate.
  • In her testimony to the Senate, Yellen warned that if the labor market continues to improve quicker than anticipated by the Committee, then increases in the Federal Funds Rate target would likely occur sooner and more rapidly than currently envisioned. Ironically, famed hedge fund manager Dan Loeb, in his quarterly letter, stated that anticipating a rate hike from the Fed is like "Waiting for Godot" (referring to Samuel Beckett's play where two characters wait endlessly for a friend to arrive who never does).
  • Bloomberg strategist Andrew Robinson warned of this week’s gold drop by saying the metal could retreat from its four-month highs as momentum turns bearish. In his note, Robinson used technical analysis tools to argue that gold was due for a retracement on stretched relative strength indicators.

Opportunities

  • On a recent chart book published by CIBC World Markets, the bank’s analysts suggest current real rate levels in the U.S. have coincided with $1,400 gold prices in the past. With real rates treading water around 50 basis points, thanks to both rising inflation and lower government yields, gold could be set up to outperform and rise towards $1,400 as shown in the chart below.

  • Citigroup issued a recommendation to turn strongly bullish on platinum as supply and demand factors have pushed the market further into deficit. In addition, the bank is especially positive on copper and nickel, while it updated its views on gold. For bullion specifically, Citibank highlights strong retail buying, positive ETF flows and rising inflation concerns as reasons that underpin strong support for the yellow metal.
  • Raymond James’ analysts published a research report on Dundee Precious Metals entitled “More Precious than Meets the Eye.” In the report, analysts highlight Dundee’s diversification and vertical integration, together with its strong growth prospects as reasons to buy the stock. In addition, a recent refurbishment of the company’s Tsumeb Smelter could become a significant profit generator. The analysts also state that Dundee’s shares trade at discount multiples relative to other junior gold producers, making this valuation attractive for new buyers into the stock.

Threats

  • Goldman Sachs’ Jeffrey Currie has reiterated his bearish call on gold even as bullish wagers increase. According to Currie, gold has found support on investor concerns about inflation. In his view however, gold will weaken as evidenced in the fears of economic recovery trumping inflation.
  • According to Boenning & Scatterhood, U.S. Treasury data is showing a slowdown in tax receipts since the economic slowdown began over a year ago.  The firm argues that the weakening of tax receipts suggests the U.S. economy is not experiencing a weather bounce as some predicted, and reiterates its belief that the U.S. will grow at just 1.5 percent this year.
  • In addition, "epic disaster" is what the team at Zero Hedge (ZH) used to explain what happened with U.S. housing starts and permits in June. According to ZH, housing starts were expected to print at a solid 1,020K, to validate the much touted economic recovery. Instead, May numbers were revised downward, while June’s numbers crashed to 893,000 – a drop of 92,000. This is the biggest drop since the January polar-vortex effect, and the biggest miss to economists’ expectations since January 2007.

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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