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SWOT Analysis: Election Spotting

Commentaries & Views

Strengths

  • The best performing metal this week was platinum, up 4.29 percent as hedge funds cut their bearish platinum view to the lowest in seven months. Gold ended October with a gain for the first month in seven. The Bloomberg Intelligence (BI) Global Senior Gold Valuation Peer Group Index is headed for its biggest monthly increase since August 2017, reports Bloomberg. Traders and analysts in the weekly Bloomberg survey are mixed on the gold price outlook this week amid uncertainty of how U.S. midterm elections will affect markets. “If the Democrats win the house, that is positive for gold because we won’t get more tax reform, though the response could be delayed,” says Adrian Day, chairman and CEO of Adrian Day Asset Management.

  • In a rare turn of events, both gold and the dollar performed well in October. Historically, the two assets move in opposite directions, with the yellow metal suffering as the dollar gains. Bloomberg reports that both gained ground for the first time in 20 months in the same month.

  • Iran is looking to gold for safety during times of increasing sanctions. The country’s demand for gold bars and coins rose to a five-year high in the third quarter of this year  after U.S. sanctions imposed on the precious metals trade resumed on August 7. Centamin PLC reported positive third quarter results, with production climbing 27 percent to 117,720 ounces of gold.

Weaknesses

  • The worst performing metal this week was gold, coming in essentially unchanged for the week. Australia’s Perth Mint reported that minted gold bar sales fell to just 36,840 ounces in October, down from 62,552 ounces in September. The U.S. plans to impose sanctions on troubled Venezuela to target its recent behavior of exporting gold to Turkey. The nation’s gold reserves have shrunk by more than half since the end of 2014, as the government has been selling bullion to support its struggling economy and government operations, reports Bloomberg. Managing researcher at CPM Group Jeffrey Christian says that most of Venezuela’s gold has been sold to prop up the government and that the nation “is a backwater in terms of the gold market.”

  • On Friday morning it was announced that the U.S. economy added more jobs than expected. Bloomberg’s Susanne Barton writes that this could mean the gold rally might not last. The dollar has remained resilient and the rebound in global equities has trimmed demand for gold as a safe haven asset.

  • Average hourly earnings for private workers advanced 3.1 percent from a year earlier, the biggest pay leap since 2009, while the unemployment rate held steady at 3.7 percent, a 48-year low. Even as pay continues to rise, Americans are still increasing their spending and pushing down the savings rate to the lowest this year, reports Bloomberg. U.S. Commerce Department data shows that Americans saved 6.2 percent of their disposable income, matching the lowest level since 2013.

Opportunities

  • Goldman Sachs economists predict a divided Congress as the most likely outcome of the U.S. midterm elections next week, with Democrats taking control of the House of Representatives and Republicans retaining a small majority in the Senate. Analysts including Mikhail Sprogis and Jeffrey Currie wrote in a report that “this is incrementally bearish on U.S. growth but bullish on gold.” Goldman Sachs also sees strong fundamentals for gold, as the most recent rally coincided with the selloff in equities. The bank forecasts a slowdown in U.S. growth to 2.6 percent, down from 2.9 percent, and a pickup in core inflation to 2.5 percent. Election results could see the dollar’s rally end due to political uncertainty and a smaller chance of fresh economic stimulus, writes Bloomberg’s Austin Weinstein.

  • The World Gold Council (WGC) reported this week that central banks bought around $5.8 billion worth of gold in the third quarter of this year, marking the biggest buying spree since 2015. Central banks largely buy gold in an effort to diversify their reserves. Since the yellow metal is a finite asset, as opposed to fiat currency, it can help economies stabilize amid times of economic turbulence. Hungary and Poland emerged recently as big gold buyers in an effort to shift away from the dollar-denominated financial system and brace for a potential currency risk as global inflation picks up.

  • The London Bullion Market Association (LBMA) surveyed attendees at its annual gathering in Boston and results show that gold is forecast to climb 26 percent in the next year, up to $1,532 an ounce. According to George Milling-Stanley, head of global strategy at State Street Global Advisors, gold’s next significant resistance level is $1,350 an ounce and prices may test that level within six to 12 months. We’re now entering the historically strongest eight months for gold demand, with festivals in India and China, as well as Christmas and Valentine’s Day celebrations, writes Bloomberg. Perth Mint CEO Richard Hayes said in an interview at the LBMA last week that the recent stock selloff has reignited caution in many investors. Hayes also said that “if the midterms go badly for Trump, you’ll see a return to gold” because “a lot of Trump’s true believers are precious metals buyers.”

Threats

  • According to the WGC, demand for gold during India’s festival of Diwali may be moderate due to a lack of liquidity in the market, which has raised the country’s bullion prices. India, the world’s second largest consumer of gold after China, has seen imports on a declining trend due to the government’s efforts to curb its trade deficit. This is significant since the country must import almost all of its gold.

  • The $700 million Rhicon Currency Management hedge fund shut down the bulk of its positions three weeks ago, and the fund’s intra-month strategy is completely flat because nothing looks compelling, according to managing director Peter Jacobson. Jacobson is not trading and the restraint has served the fund well, as it is up nearly 5 percent in a year that has seen most macro managers stumble. Rhicon was also previously bullish on the dollar, but is not so much anymore. Bloomberg reports that U.S. auto sales might fall into negative territory for the year as a whole due to plunging demand for passenger cars and costlier loans. China’s automotive market has been damaged by the trade war with the U.S. and might be considering a tax cut to help revive the market.

  • According to JPMorgan Chase, if investors want to avoid geopolitical risk they should increase positions in the dollar and volatility indexes, while leaving favorite hideaways such as the yen and gold. The bank said that traditional safe havens haven’t necessarily been holding up as stores of value during times of new geopolitical threats and market turbulence.
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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