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SWOT Analysis: Gold Prices at their Highest Since August 2016

Commentaries & Views

Strengths

  • The best performing metal this week was silver, up 1.68 percent.  Gold traders remain bullish on the yellow metal for a third week on sustained dollar weakness, according to the Bloomberg weekly survey. The gold price heads toward its highest since August 2016, soaring above $1,350 this week.

  • Australia will be opening its first gold-backed ETF, the Perth Mint Gold ETF Trust, which seeks to be listed on the NYSE, according to a U.S. government filing. 

  • After poor performance in 2017, platinum has started to outperform palladium. Precious metals are on the rise even after the Federal Reserve raised rates in December.

Weaknesses

  • The worst performing metal this week was palladium, down 1.72 percent as traders seem to be looking to platinum for outperformance. The gold price fell briefly this week after President Trump downplayed remarks by U.S. Treasury Secretary Steven Mnuchin that “a weak dollar is good for trade,” reports Bloomberg. The gold price then rebounded. China’s purchasing of bullion from Hong Kong fell to the lowest level in five years to a total of 602 tons in 2017.  

Gold drops as dollar jumps on Trumps comments

  • Gold has started the year strong, up 6 percent; however, the South African rand is also performing strongly. South Africa, a top gold-producing nation, might see mining companies miss out on the benefits of a higher gold price as they pay using the local rand currency. When both the gold price and rand are strong, profit margins are squeezed and can eliminate profitability of certain productions.

  • The gold market might adopt blockchain technology to keep track of the roughly $200 million in gold dug up from mines all over the world and sold to buyers using middlemen. This represents a big shift in commodities looking to make use of new technologies. Cryptocurrencies fell on Friday after one of Japan’s biggest bitcoin trading venues, Coincheck, halted withdrawals. Coincheck also reported that $400 million in the NEM cryptocurrency was lost after being sent illicitly, reports Bloomberg.

Opportunities

  • Analysts are forecasting gold could near $1,400 per ounce by the end of the year, citing further weakness in the dollar and rising risks of a correction in equity markets. Stephen Innes, head of trading for Asia Pacific at brokerage Oanda Corp. said that gold at $1,400 could be achievable in the next two months, writes Bloomberg. Caterpillar, Inc. forecasts that it will increase spending in mining due to global economic momentum and rising commodity prices.

  • U.S. Treasury Secretary Steven Mnuchin endorsed a declining dollar at the World Economic Forum this week saying that “a weaker dollar is good for us as it relates to trade and opportunities.” Daniel Morris, senior investment strategist with BNP Paribas Asset Management told Bloomberg Television that the U.S. economy “has a current-account deficit and it needs to close that – one way to do that is for the dollar to depreciate.” A weaker dollar has historically been good for gold.

  • Gold mining companies will be generating more cash this year as gold rises and the industry’s growth prospects stagnate after years of cutting budgets, writes Bloomberg’s James Attwood. As gold is up 3.5 percent in January and was up nearly 14 percent last year, gold miners have some catching up to do since we’re currently seeing a disconnect in the gold price and mining stock prices.  There is still a lack of belief that gold is going to go higher and the gold mining stocks, particularly the junior space, have not been bid up yet.

Threats

  • Risk is escalating in the equities market after investors poured the most money ever recorded in a week into equity funds last week. Bank of America Merrill Lynch strategists forecast a market pullback coming in the first quarter and indicated the highest “sell” signal since March 2013. More evidence that something might be amiss is that the usually reliable quant strategy is suddenly not performing. Joseph Mezrich, head of U.S. quantitative analysis at Nomura Instinet LLC, said that what we’re observing is “people panicking to get into these stocks because of a fear of missing out. It’s a lack of rationality.”

  • Ray Dalio, prominent hedge fund manager, said that he predicts a 1 percent rise in bond yields will produce the largest bear market in bonds since 1980, speaking in a Bloomberg TV interview this week. Oaktree founder Howard Marks had a similar view saying that all the easy money has been made in the market and investors should now be defensive as prospective returns are well below normal for every asset class.

  • Another sign of potential disarray in the market is General Electric Co. plummeting again this week after Deutsche Bank released a report questioning their next move. GE was the biggest loser in the Dow Jones last year struggling with weak demand for its industrial products.  As a bellwether American company that produces products that span across a number of industries, it’s a bit disconcerting that the outlook for stock markets is so positive.
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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