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SWOT Analysis: Will Higher Housing Costs Cause Gold Prices to Rise?

Commentaries & Views

Strengths

  • The best performing metal this week was palladium, up 3.02 percent. After polling neutral last week, gold traders and analysts are back to a bullish view of gold, according to the Bloomberg survey. This week gold ETFs added 91,867 troy ounces of gold to their holdings, the largest one-day increase since early December.

  • Inflation increased last month due to higher housing costs, reinforcing the outlook that the Federal Reserve will possibly raise interest rates several times throughout 2018. The core consumer price index also increased 1.8 percent from a year earlier, according to Bloomberg. Higher inflation is generally linked to higher gold prices.

  • Open interest on gold, the tally of outstanding futures contracts, posted the longest stretch of gains in more than a decade. Futures margins were cut for gold from $4,000 to $3,500 and for silver from $4,700 to 4,000; this will make it easier to buy a futures contract for both precious metals.

Weaknesses

  • The worst performing metal this week was silver, up just 0.67 percent.  The price of oil climbed to a three-year-high to $70 this week, amid OPEC production cuts and growing demand. America may be on its way to being the top oil producer with output headed for 11 million barrels a day in 2019, according to Bloomberg.  A higher oil price has the potential to negatively affect miners.

  • The Fort Worth, TX, branch of the Securities and Exchange Commission joked on Twitter this week that it was going to add “blockchain” to its Twitter name in order to increase the number of social media followers.  Many believe the cryptocurrency frenzy is coming to an end after digital currencies have performed poorly since the start of 2018. Grant’s Interest Rate Observer said this week that cryptocurrencies are not money and that in troubled times people will still turn to gold.

  • Torex Gold announced it has regained access to the El Limon-Guajes Mexico mine after worker strikes prevented production for several months. The company also announced that its Chief Financial Officer, Jeff Swinoga, will be leaving after four years of service.

Opportunities

  • Many countries around the globe are experiencing labor shortages, including Japan and Germany. Labor shortages often lead to higher wages, which in turn increases inflation. Although this has not happened to the U.S. yet, Federal Reserve Bank of New York President William Dudley noted in remarks this week that if labor markets were to tighten much further there would be greater risk that inflation could rise substantially as some think the economy is at risk of overheating due to the tax cuts.

  • U.S. payrolls gained fewer than expected in december as jobless rate held steady

  • Officials in China who review foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasures. The market for U.S. government bonds may become less attractive relative to other assets, and trade tensions between the U.S. and China may provide a reason to slow or stop buying American debt, writes Bloomberg. The following day Chinese officials denied these reports and said they are not slowing purchases of U.S. Treasuries. Although higher bond yields are traditionally negative for gold, some say gold is actually benefitting from this growing uncertainty in financial markets and a weaker U.S. dollar.

  • Klondex Mines followed through on putting the True North Mine on care and maintenance this week after the operation failed to achieve planned operation and cash flow metrics in 2017 with production coming in at 24,000 – 27,000 ounces, which is about 10,000 ounces short of guidance.  The mill will continue to process exiting stockpiles and reprocess tailings running at 1.2 Au/gpt  for between $2 to $4 million of annual free cash flow.  The original purchase price was around $30 million for True North out of receivership, so this was a fairly low risk endeavor. Ultimately, however, Klondex could not get the economic margins needed to profitably run the operation and this was the smartest decision for management to stop allocating capital to a low return project.  While this was a painful learning experience for Klondex, we expect it will remove a distraction from the story as Klondex returns to focus only on its Nevada operations.  The company’s share price hit a 52-week low and certainly could be at risk of a takeout offer at these levels.

Threats

  • The Democratic Republic of Congo proposed to more than double the taxation of cobalt exports. The nation supplies two-thirds of the world’s supply of cobalt, which is a critical metal for battery production. Royalty miners could pay a tax of 5 percent of exports, up from 2 percent if the rule is formally adopted.

  • As a part of the new tax overhaul, the endowments of wealthy private universities will now have to pay a 1.4 percent levy. The new tax measure disproportionately affects Democratic states with 22 of the 28 colleges subject to the tax reside in blue-heavy districts.  

  • Australia’s government expects the price of gold to drop in the next two years due to increasing yields on U.S. Treasuries as the Federal Reserve tightens their monetary policy, according to Bloomberg. Australian gold production is expected to increase annually by 3.7 percent to 306 tons, up from 285 tons the previous year.
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 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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