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SWOT Analysis: Have We Reached Peak Gold?

Commentaries & Views

Strengths

  • The best performing metal this week was gold, down 1.10 percent. Holdings in the SPDR Gold Shares ETF, which accounts for more than one-third of total bullion-backed ETFs, have fallen to the smallest since August. However, gold assets in the London-listed iShares Physical Gold ETC are at a new record. Investors in the U.K. are seeking a haven for their investments as Prime Minister Theresa May struggles to keep the government together, writes Bloomberg. Investors added $17.5 million in assets to the State Street SPDR Gold MiniShares ETF, an increase of 33 percent, for the fourth straight day of inflows. This is a new ETF with lower fees than the SPDR Gold Shares ETF mentioned earlier.

  • U.S. wholesale prices rose by the most since November 2011 in the 12 months ended in June, as the costs of services accelerated, as shown in a Labor Department report this week. Bloomberg’s Shobhana Chandra writes that this is an indicator that inflation pressures in the production pipeline are firming due to increased demand and tariffs on steel and other goods. Inflation has historically been positive for the price of gold.

  • Japan’s largest gold retailer said that gold bar sales in the first half of this year climbed 32 percent compared to the prior year due to falling prices, yen appreciation and growing demand from local investors. Oil saw its biggest weekly loss in more than five months due to escalating trade tensions, which is positive for precious metal miners in easing energy costs at mines.

Weaknesses

  • The worst performing metal this week was platinum, down 1.80 percent as hedge funds boosted their bearish platinum outlook. Investors withdrew money for the ninth straight week from commodity-focused ETFs, reports Bloomberg. Outflows from ETFs that invest in precious metals narrowed while funds that can buy all types of commodities had losses, the article continues.

  • Sentiment for gold remained bearish this week, with traders saying this comes on the back of a subdued global trend, reports Bloomberg. The dollar extended gains from the previous session with U.S. inflation data along with trade war concerns boosting demand for the greenback. Other U.S. data came out this week, showing that some 3.56 million workers left positions in the month of May. According to Labor Department data, that is the most Americans quitting since 2000 and up from the prior month’s 3.35 million workers. 

  • Greg Barnes, an analyst with TD Securities, downgraded the recommendation on Kinross Gold Corp. to buy from action list buy, reports Bloomberg. Kinross recently had analyst tour their Fort Knox operations in Alaska where the mine’s life could be extended another nine years with the addition of the Gilmore property.

Opportunities

  • According to Bloomberg Intelligence Commodity Strategist Mike McGlone, the history of compressed gold prices could be a guide to show that the dollar should be peaking, with a potential for higher gold prices. McGlone writes that it has been almost two decades since gold sustained a narrower 24-month range and that the most recent similarly compressed period in 2001 and 2002 coincided with a peak in the trade-weighted broad dollar index and a bottom in gold. The yellow metal could also rise due to slumps in production. South Africa was once the world’s biggest producer of gold; however, production has been in a steady decline the last few years and fell 16.2 percent from a year earlier in May, for eight straight months of decreases. Another headwind for gold production in South Africa is that mining unions began wage talks this week where laborers have demanded a 37 percent increase in pay, as producers are constantly struggling to reduce costs in the world’s deepest mines.
  • south african gold production contracted the most in 15 months

  • Barrick Gold Corp., the world’s largest producer of gold, reported a decline in second-quarter production as planned maintenance weighed on output, as expected. The gold miner produced only 1.05 million ounces in the first quarter of this year, which is the lowest amount for Barrick in 16 years. This emphasizes the notion that the world has hit “peak gold” supply where most of gold has already been discovered and it’s become much more difficult to find new deposits. Tighter gold supply can lead to higher prices.
  • barrick shrinkage gold output up from last quarter but still down from 2017

  • The Federal Reserve began shrinking its balance sheet in October of last year and has already shrunk it by about $179 billion, with an expectation of eventually shrinking by $1.9 trillion. However, as Cornerstone Macro writes, the balance sheet shrinking is contributing to push the effective federal funds rate closer to the top of the range the Fed specifies, which was not supposed to happen so early. This could lead to rates not being increased by as much or as fast as previously expected with the Fed maintaining $800 billion to $1 trillion than expected on its balance sheet.

Threats

  • JPMorgan writes that if a global recession is looming, it might be time to own the Swiss franc, Singapore dollar, the U.S. dollar and the Japanese yen and to let go of emerging market currencies. Recessions are when creditors start to ask for their money back and the U.S. dollar would benefit since it is the world’s default funding currency. JPMorgan says that talk of a recession is “premature” and drew its research of currency performance over the last five recessions.

  • A Bloomberg opinion piece from Noah Smith shows that tightened immigration policies might have been a contributing factor to the stock market crash of 1929. In 1924 immigration was severely curtailed and the result of this dramatic drop in population influx was that it reduced long-term economic growth. Reducing the flow of people also limited the economy. The housing crash in the mid-1920’s might have been a direct result of the tightening of immigration, which then exacerbated the stock market crash in 1929.  History can repeat itself if the lessons are forgotten.

  • The U.S. released a list of an additional $200 billion in tariffs on Chinese products this week. There have been growing signs of frustration among GOP lawmakers as House Speaker Paul Ryan has said that tariffs “are not the solution.” Bloomberg writes that many Republicans have said they want to give President Trump a chance to see if his tariff approach works or persuade him to back down, rather than restricting his power to impose such tariffs. The tariffs might not have taken much of a toll on the economy yet as a lull in U.S. consumer inflation in June could prove temporary as the tariffs take effect.  Oddly on the new tariff list are rare earth elements that are used in everything from phones to wind turbines, but the U.S. has no domestic production and China accounts for 85 percent of the world’s production and 78 percent of our imports. 
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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