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SWOT Analysis: Inflows Into Gold ETFs Are Gaining Momentum

Commentaries & Views

Strengths

  • The best performing metal this week was silver, up 3.06 percent, partly on the stronger gold price and on the news that the world’s third largest refinery was forced to halt production due to a failed blast furnace. The yellow metal was on fire this week and is heading for its best week in a year. The weekly Bloomberg survey showed that most gold traders and analysts are bullish going into next week as gold rose near the highest level in three months. Investors took note of the rally as assets in the largest bullion-backed ETF rose 2.2 percent on Monday – the equivalent of 16.44 metric tons. Much of the gold price action is driven by the growing geopolitical tensions surrounding the trade war.

  • Another big driver for gold this week was poor ADP data and job growth. Companies in May added the fewest U.S. workers in any month since 2010, according to ADP data. Only 75,000 jobs were added in May versus an expected 175,000.

  • Gold imports to the world’s second largest consumer of the metal, India, grew 36 percent in May from a year earlier, as customers rushed to buy after prices fell to their lowest level this year last month due to a stronger rupee, and then have subsequently risen this month so far.

Weaknesses

  • The worst performing metal this week was platinum, up just 1.49 percent as hedge funds pushed their bearish view to a 15-week high. Bloomberg reports that Venezuela defaulted on a gold swap agreement valued at $750 million with Deutsche Bank. In 2016 Venezuela signed an agreement for a cash loan and put 20 tons of gold as collateral. A big headwind for gold in the past few months has been the troubled South American nation’s gold reserve selling, which amounted to $570 million in just May alone. Any wonder why gold was having difficulty going up when you have a significant distressed seller in the market?
  • Dacian Gold saw its shares plunge a whopping 76 percent in this week after it received multiple downgrades because of lowered guidance. RBC Capital Markets analyst Paul Hissey said “Dacian is likely to now be uninvestable for some at any price.” RBC lowered its price target for the gold miner from $3 to just $0.50. Gold explorer NuLegacy announced on Monday that it had suspended all field exploration on its Red Hill property in Nevada to preserve cash. The stock fell 55 percent this week on the news.

  • Tiffany & Co. said sales to Chinese tourists fell by more than 25 percent last quarter due to the trade war tension with the U.S. The Swiss Competition Commission said that it is suspending its investigation into whether banks colluded in precious metals trading due to a lack of evidence. Perhaps now they can investigate Glencore since almost every other security regulation agency outside of Switzerland has an investigation open against them.

Opportunities

  • Ecuador just made a big show of support for the nation’s mining industry. The Vice President and Minister of Energy and Non-renewable Natural Resources visited Lundin Gold’s flagship project, where 50 percent of the construction is completed. The officials also presented a new Public Mining Policy that focuses on supporting large-scale operations and investments, and eradicating illegal mining.

  • The focus on “weak dollar policy” continues from lawmakers. Senator Elizabeth Warren called for “actively managing” the U.S. dollar’s valuation as a part of a plan to create more American jobs. A weaker dollar has historically been positive for the price of gold. President Trump has also been critical of a strong dollar.

  • The junior gold space is starting to get interesting as major miners are striking deals to fund some of the best projects they see going forward. PolarX secured an initial investment of $4.3 million from Lundin Mining to acquire an earn-in option on its Alaskan copper-gold projects with a staged spending program of up to $24 million on the property. PolarX has already drilled and identified a skarn deposit, which it will retain the ownership to, but Lundin is interested in any major copper-gold porphyry deposits on the land package which is all on state land, thus unencumbered by federal permitting or native titles. TriStar Gold announced that it will sell Royal Gold a stake in the company and a 2 percent net smelter royalty on its Castelo de Sonhos property in Brazil. The funding for TriStar will cover its budget for the next two years.  Lastly, Chakana Copper Corp announced that it completed a previously announced private placement with Gold Fields to fund its project.

Threats

  • Bloomberg reports that the trade war has already wiped out most of the average American’s household savings from the 2017 tax cuts. Only $100 remains of the average $930 tax break due to tariffs on Chinese imports. The additional tariffs and now added to Mexican imports on Monday, could cost middle-earning households a massive $4,000.

  • South Africa’s Minister of Mineral Resources and Energy said this week that gold output from the once top producer will continue to decline due to a lack of exploration for new deposits.

  • Liquidity in the credit market could be a big problem soon. Bank of America’s CEO Brian Moynihan said that leveraged finance threatens to become an issue in the broader market. According to a survey of investors at JPMorgan Chase’s U.S. Macro Quantitative and Derivatives Conference in New York last month, the greatest risk to quant strategies wouldn’t be an equity bear market or a rate increase. Rather, it would be a collapse in liquidity. Pimco’s fund managers are also concerned about liquidity after noticing that the bid-offer spread shows trading costs are approaching the December levels.
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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