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SWOT Analysis: As Disappointing Data is Released, the More Appeal Gold Has as a Safe, Long-Term Play

Strengths

  • Gold traders remain divided amid speculation over the timing of U.S. interest rate increases. Survey results show seven bullish, six bearish and six analysts with a hold recommendation. As of April 3, Shanghai Gold Exchange withdrawals stood at 647 metric tons (Mt). Annualized, that would come out to 2,600 Mt for 2015 versus 2,100 for last year.

China Central Bank Hoards Gold

  • The New York Federal Reserve’s Empire State manufacturing reading fell to -1.19, missing estimates of 7.17. Another Fed report showed total industrial production fell 0.6 percent in March, the biggest drop since 2012. Market commentators were expecting economic activity to pick up in April after extreme weather impacted first-quarter results. April data so far suggests otherwise. As more disappointing data is released, the more appeal gold has as a safe, long-term play.
  • Klondex announced the recovery of 32,542 gold-equivalent ounces during the first quarter. This puts the company on track to meet, and perhaps exceed, its 2015 production estimates of 120,000 to 125,000 gold-equivalent ounces. Kirkland Lake’s reserve update highlighted the high-grade, long-life potential of its Macassa Mine Complex in northern Ontario.

Weaknesses

  • The global benchmark for silver prices has fallen 17 percent in the past year as stockpiles continue to surge. Silver inventory, monitored by the Shanghai Futures Exchange, almost tripled to 341.5 metric tons by April 9, the highest in a year from 122.8 tons during the final week of 2014. 
  • Solar panels are one of the bigger users of silver outside of fabricators of silverware and jewelry.  While China’s economy expanded 7 percent in the first quarter from a year earlier, this is the weakest pace since 2009 and perhaps sheds some light on the inventory build.
  • Gold Fields reached an expensive wage settlement with South African unions. The three-year wage agreement resulted in average annual wage increases of 10 percent, including a 21 percent increase in year one for entry-level workers signed with registered trade unions.

Opportunities

  • Analysts at Bank of America Merrill Lynch think the worst is over for gold, forecasting a price of $1,500 an ounce by 2017. Although the U.S. economy seems to be moving forward, the analysts expect delayed and more muted rate hikes which would help gold break out of recent ranges. Additionally, a survey ran by the group found that 68 percent of respondents think the U.S. is the most overvalued region and 13 percent said the U.S. dollar is overvalued against the euro and the yen. This is a big reversal from the prior month where 12 percent of respondents said the currency was undervalued. Citigroup analysts said that while 2015 is still a vulnerable year for gold, the 2016-2020 period should be more supportive.
  • Unidentified sources said AngloGold Ashanti is in talks with Newmont Mining and Kinross Gold to sell part or all of its Cripple Creek Mine in Colorado. The sale could raise as much as $1 billion and help AngloGold pay down debt. Mick Davis, the ex-Xstrata CEO, has considered buying a Canadian mining company. Hudbay Minerals, Capstone Corp and Imperial Metals Corp are among companies thought to be takeover candidates, according to those familiar with his plan.
  • Alamos and Aurico stocks rose this week on the news of an equal-sided merger. The deal effectively puts both companies in play.  Steven Green with TD Securities noted the deal effectively rescues Aurico from its balance sheet issues and provides no premium to Alamos’ shareholders.

Threats

  • According to the International Monetary Fund’s (IMF’s) latest Global Financial Stability Report, since October 2014 financial risks have risen and rotated to parts of the financial system that are harder to assess. The report suggested risks are rotating away from banks and into shadow banks, from solvency to market-liquidity risks, and from advanced to emerging markets. Separately, BCA’s Global Investment Strategy believes that both the Federal Reserve and the investment community are underappreciating the difficulty that the U.S. economy will have in maintaining even, trend-like growth in the absence of continued low rates.

FOMC Headed for a Policy Mistake?

  • Paul Christopher, head of international strategy at the Wells Fargo Investment Institute, said the recent gains in the price of gold have been supported by a series of sluggish reports on the U.S. economy, largely attributed to harsh winter weather. This would point to gold’s recent gains as being transitory. He warned not to bet against the U.S. economy and a strong U.S. dollar.  In contrast, the analyst earnings revisions ratio for the S&P 500 has fallen for the eighth month in row, not exactly transitory noise.
  • Investor and former IMF economist Stephen Jen said there is pent-up demand for the U.S. dollar that will underpin years of appreciation, noting that much of the world is structurally short the dollar. He said sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years.

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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