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SWOT Analysis: Gold Futures Jump after U.S. Jobless Claims Increase

Strengths

  • Gold traders turned bullish for the first time in three weeks as prices neared four-year lows. Additionally, this month U.S. Mint gold coin sales are already more than half of what they were in October, which was the strongest month since January. Austria Mint sales are up 40 percent from October.
  • Gold prices rallied on Friday as more than 10,000 contracts for December delivery were traded, pushing the gold price up 1.5 percent within six minutes. Moreover, the one-, two-, three- and six-month gold forward offered rates turned negative, signaling increased physical demand in a tightening market.  Robin Winkler of Deutsche Bank wrote that current polling on the referendum in Switzerland (to require its national bank to hold 20 percent of its reserves in gold) was now leading in the polls.
  • On Tuesday, gold futures jumped higher after a report showed that U.S. jobless claims increased more than forecast last week.

Weaknesses

  • The World Gold Council announced that gold demand fell to the lowest level in almost five years in the third quarter as bar, coin and jewelry purchases slowed.
  • Silver shorts are at record highs as the market remains negative on the precious metals sector due to the strong U.S. dollar. Fund shorts account for 39 percent and 54 percent of total open interest for Comex silver and Nymex platinum, respectively.
  • Switzerland’s regulator charged UBS AG employees with front-running in precious metals trading, particularly in silver, as part of its review of the bank’s foreign-exchange business. The Swiss regulator and those in the U.S. and the U.K. ordered UBS and four other banks to pay about $3.3 billion to settle a probe into the rigging of foreign-exchange rates.

Opportunities

Will Liquidity Run Dry Before the Fed Raises Rates
  • The UBS commodity strategy team published a contrarian report stating that liquidity will run dry well before the Federal Reserve has a chance to increase the Fed Funds rate, according to the research firm’s Proprietary U.S. Liquidity Indicator. As a consequence, they believe the next significant action of the Fed will be an attempt to reflate the U.S. economy, not rein it in. This leads to a bullish outlook on both dollar cash and gold equities.

Gold Has Historically Rallied When Federal Reserve Takes Action

  • The same UBS report delineates that gold stocks will outperform bullion as the Fed likely reflates the economy. The research firm’s Fed Action Model predicts when the Federal Reserve is likely to act when the reading falls below zero. Furthermore, their reasoning for gold stocks outperforming bullion is a result of two types of gold rallies. The first is a reflationary boom scenario where bullion outperforms gold stocks as commodity appreciation causes costs to rise. This leads miners to low grade operations and undertake high-cost expansions and M&As. That was the case in 2004 -2007 and 2009-2011. The second type of rally is characterized by risk aversion flows out of credit and equity and into treasuries. Costs at the mine fall as commodity currencies decline. Miners cut costs and restructure. With gold in a bear market, the stocks are financially and operationally geared. This was the case in 2001-2002 and during the last four months of 2008. This is the scenario the UBS team sees presently unfolding.
  • Anita Soni of Credit Suisse believes gold mine production is likely to plateau in 2014 and decline over the medium term. This would be a tail impact of significant CAPEX from 2010-2012 that has now entered production and producer expenditures on growth capital. Gold mining exploration has also been cut. This supply shortage would push gold prices higher.

Threats

  • India, the world’s biggest gold user after China, announced it will review bullion import rules after purchases in October jumped to the highest level this fiscal year. Though no indication has been given, any import restrictions could be a headwind for gold prices.
  • The labor movement in South Africa has been thrown into turmoil after the November 8 decision by the Congress of South African Trade Unions to expel the National Union of Metalworkers of South Africa. The decision was opposed by seven of the 20 other affiliates and sets the stage for a fight over loyalty and membership dues of the remaining 1.85 million members. South Africa’s labor relations are the most hostile of 144 countries, according to the World Economic Forum, and the country had 114 strikes last year that resulted in 6.7 billion rand ($597 million) in lost wages.
  • UBS cut its one-month gold target from $1,250 per ounce to $1,180 per ounce citing weak sentiment, light positioning and an extreme amount of shorts.

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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