Make Kitco Your Homepage

SWOT analysis: investors bought gold at fastest pace in three years

Commentaries & Views

Strengths

  • The best performing metal this week was platinum, up 1.89 percent. London-based BullionVault said in a report that investors bought gold at the fastest pace in three years, with the number of buyers jumping to 34 percent last month. Its gold investor index rose to an 11-month high of 55 in August, versus 52.6 in July. Investors swarmed toward gold in August. According to data compiled by Bloomberg, inflows into gold-backed ETFs topped 100 tons to hit the highest since February 2013. Even as gold took a big tumble this week, traders and analysts surveyed by Bloomberg are still bullish on the metal.

  • Other precious metals had better weeks than bullion. Silver hit a three-year high early in the week and platinum continued its rally. The gold-to-silver ratio also fell to the lowest since August 2018, demonstrating that silver is catching up. In August, silver surged 13.3 percent compared with a 7.6 percent gain for the yellow metal. Turkey was bullish on gold last week. The central banks’ gold holdings rose $1 billion from the prior week to now total $25.7 billion.

  • The ISM manufacturing purchasing manager’s index (PMI), an important forward-looking gauge of economic activity in the U.S., has been declining steadily for months now, and in August, it shrank for the first time in three years. The PMI stood at 49.1, down from 51.2 a month earlier, its lowest reading since March 2016. Gold historically performs well in times of economic uncertainty.

Weakness

  • The worst performing metal this week was silver, down 1.19 percent. Gold posted its biggest loss in more than a year on Thursday, falling as much as 3 percent, as signs of easing trade tensions curbed demand for the metal as a safe haven asset, writes Bloomberg’s Justina Vasquez. Gold and silver miners also took a big tumble when China announced that it had agreed to trade talks with the U.S. early next month. However, some of those losses were erased on Friday morning after the U.S. economy added fewer jobs in August than expected. Later on Friday Fed Chairman Jerome Powell made comments that had little impact on expectations for further easing.

  • Bloomberg reports that gold imports by India fell to 14.8 metric tons in August, down 84 percent from 92.1 tons a year earlier. Demand has decreased largely due to high gold prices in the world’s second largest gold consuming nation.

  • Newmont GoldCorp announced the pricing of its public offering of $700 million total principal amount of 2.8 percent senior notes due in 2029, according to Zacks Equity Research. The net proceeds of the offering will be used for repayment of outstanding senior notes that are due next month. While refinancing existing debt with cheaper debt makes economic sense, we would rather see the debt load go down to improve the value of the equity.

Opportunities

  • RBC Capital Markets Research Analyst James Bell wrote a note raising its forecast on gold. The group noted that the macro outlook for gold has improved materially and that real rates in the U.S. and globally have pushed gold prices to a six-year high. The note emphasizes that generalist investors are still underweight the sector and that we are currently in a “sweet spot” of higher prices without the mandate yet to buy from generalist throwing in the towel.  Many of the junior companies share prices will lift with the broadening of the gold market, which just seems to be starting with silver and platinum now getting a bid.

  • BNP Paribas SA says that gold will surge above $1,600 an ounce as the Federal Reserve continues to cut interest rates to combat slowing U.S. growth. In the chart below the negative correlation between the gold price and U.S. real rates in clear. With the Fed expected to complete a quartet of cuts, this should be positive for the yellow metal.

  • Platinum is riding the precious metals rally, with futures hitting $1,000 an ounce this week, a level last seen in February 2018. According to the World Platinum Investment Council, global platinum demand is forecast to rise 9 percent this year, driven by increased buying from ETFs. WisdomTree lifted its silver outlook and expects to see the white metal at $19.90 by the end of the quarter. These two metals rallying, along with gold, demonstrate that the precious metals rally is broadening.

Threats

  • Billionaire hedge fund manager Ray Dalio believes there’s a 25 percent chance of recession this year and in 2020 in the U.S., reports Bloomberg, and that central bankers will be limited in addressing it. Dalio, who continues to advocate gold, says the yellow metal will be in demand as investors seek alternative forms of money as central bank stimulus nears “the limit of its effectiveness.” Earlier in the year he also pointed out flaws with capitalism – specifically pointing to gaps in education, social mobility and income that threaten the health of the economy.

  • BMO Capital Markets, in its recent precious metals publication, says the rapid rise of precious metals pricing has fueled discussions on whether hedging should be making a comeback. The group explains that after several expensive experiments in hedging concluded over a decade ago, many producers have been reluctant to hedge any appreciable amount of production over a significant duration. The report also takes a look at who is hedging – apparently North American producers “generally have not entered meaningfully into hedges while international producers have.”

  • According to the Australian Financial Review, Gold Fields chief executive Nick Holland is accusing the gold sector of misleading investors, pointing to inconsistent reporting of its actual cost structure. "Any growth capital people speak about is in fact largely sustaining capital,” Holland said. “The cost to sustain production is increasing. The industry is mining more tonnes at lower grade to maintain an ounce.”   Thus if the number of gold ounces a company produces is not rising, all the capital is sustaining may be the way an investor should view the company’s capital allocation.  When gold companies start flailing their arms around saying “look at how low our cash cost/all-in-sustaining cost are” an investor should focus on “Show me the profit?”  We are expecting a proper return on our invested capital, indeed.
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.