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SWOT Analysis: China is Effectively Consuming all of the World’s New Mined Gold Supply

Strengths

  • The market for gold coins and bars in Europe is now twice as large as that of the United States, and similarly on par with those of China and India. In addition, the India Trade Ministry is said to be seeking to cut the gold import tax from 10 percent to 2 percent.
  • With new global mined gold supply averaging around 258 tonnes per month, and with 255 tonnes of gold withdrawals from the Shanghai Gold Exchange in January, China is effectively consuming all of the world’s new mined supply.
  • In 2014 governments added 477.2 metric tonnes to their reserves, the second-biggest increase in 50 years and 17 percent more than the previous year. Furthermore, central banks have added to gold reserves for the past five years, representing a reversal from two decades of selling. For investors considering adding bullion to their portfolio, gold just triggered this long-term buy signal (only the fourth one to show up in the past 10 years as illustrated by the technical chart shown below). The prior signals have come in 2005, 2007 and 2009, and each time gold rallied thereafter.

-Becoming-Currency-of-Choice-in-Turbulent-Market

Weaknesses

  • Gold traders are bearish for the first time in three months on concerns about a stronger dollar and weakening demand from China’s slowing economy.
  • Two people remained missing after Mexican police freed 10 others who were kidnapped last Friday. The incident happened in the same southern region where the disappearance and murder of 43 students in September ignited protests throughout the country. One of the people missing is a worker from Torex Gold Resources. B2Gold Corp announced the overnight shooting death on Wednesday of two security guards at the Masbate Gold Mine operating in the Philippines.
  • Greece’s new left-wing government announced it will legally oppose a Canadian-run gold mine in northern Greece belonging to Eldorado Gold Corp. on the grounds of worker protections.

Opportunities

  • The merger and acquisition (M&A) space seems to be heating up in the gold mining industry. Tahoe Resources announced on Monday it will acquire Rio Alto Mining for $1.1 billion. Mark Bristow, CEO of Randgold Resources, said the company has been “flat-out besieged with offers to buy assets.” Acacia Mining said it’s looking to do a transformational deal this year. Lastly, AngloGold Ashanti’s CEO said he is looking to sell assets or form joint ventures to reduce debt.
  • There is growing consensus in the market that an unspoken currency war has broken out. This is a result of many countries facing zero interest rates and binding fiscal constraints. With such constraints, the only policy tool at their disposal to stimulate growth is targeting a weaker exchange rate. While a weak currency might provide a short-term boost to the countries engaging in currency devaluation, the fact that so many countries are concurrently engaging in these tactics will likely mean we may end up with higher foreign-exchange volatility. In such a scenario, gold is increasingly looked upon as the currency of choice.

-Becoming-Currency-of-Choice-in-Turbulent-Market

  • U.S. retail sales tumbled 0.8 percent in January despite the “great” jobs report and sharply lower gasoline prices. Furthermore, U.S. corporate profits and sales are crumbling with companies in sectors such as technology, telecommunications, consumer discretionary and staples all seeing sharp earnings per share (EPS) slowdowns as a result of the strong dollar. Lastly, Credit Suisse recommended underweighting U.S. equities as they have slipped on both economic and earnings-momentum scorecards. A weakening of the U.S. market would provide a catalyst for gold.

Threats

  • In its 2015 outlook report, JPMorgan Chase said that a strengthening U.S. dollar, weaker energy prices and low inflation will dampen gold demand.
  • President Zuma of South Africa announced in his State of the Nation address that foreign nationals will be barred from owning land in the country, only allowing them to enter into long-term lease contracts. Furthermore, last month Zuma referred the Mineral and Petroleum Resources Development Act Amendment Bill back to parliament for reconsideration.
  • South Africa’s mining industry remains a highly complex space where aligning competing interests has proved difficult. Mining companies, labor and government seem to have very different opinions on how things should be done, leading to instability. Justin Froneman, director of equity research at Credit Suisse, said that international investors want active leadership at both the corporate and country level in order to reduce uncertainty.

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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