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SWOT analysis: the U.K.’s royal mint is planning its own gold ETF

Commentaries & Views

Strengths

  • The best performing metal this week was palladium, up 4.41 percent. Central banks continue to stock up on gold – led by Russia, the world’s top buyer for seven consecutive years. Russia’s central bank quadrupled its gold holdings in the last decade and has diversified away from U.S. assets.  According to Bloomberg, the value of the nation’s gold surged 42 percent in the past year to $109.5 billion due to higher prices. Russia is also a top miner and saw its gold production rise 11 percent in the first half of 2019 from the same period last year to 142.2 tons. China is also growing its gold reserves. The People’s Bank of China (PBOC) has raised its bullion holdings for a ninth consecutive month, adding 5.91 tons in August, reports Bloomberg.

  • Although gold demand in India is down due to higher prices, demand for gold ETFs is rising. Inflows into gold ETFs were the highest in six years in August at 1.45 billion rupees, or $20 million, according to the Association of Mutual Funds in India. N.S. Venkatesh, CEO of AMFI, said that the increase in gold prices might have influenced investors to think it is good to invest in paper gold rather than the physical metal.

  • The World Gold Council (WGC) released a list of Responsible Gold Mining Principles that companies need to follow if they want to be recognized for responsible mining, which is of growing importance to shareholders and consumers. It is a list of 10 principals aimed at improving environmental, social and governance strategies of mining companies. Terry Heymann, chief financial officer, told Kitco News in an interview that “this is a significant collective achievement for the mining sector and sets out clear expectations for the investment community.”


Weaknesses

  • The worst performing metal this week was silver, down 3.94 percent. After a big price swing to below $1,500 an ounce and three back-to-back weeks of losses, some investors are doubting gold’s rally. Last Friday the yellow metal fell to a two-week low just two days after hitting a six-year high. Gold ended this week down 1.29 percent. Bloomberg reports that a measure of 60-day volatility in gold futures climbed to the highest since February 2017. On Monday bullion futures fell as much as 1.1 percent, but then rose slightly on Thursday after the ECB announced cuts to eurozone interest rates.

  • According to a report by law firm Bryan Cave Leighton Paisner, private equity investments in the gold mining space fell by 29 percent in the first half of 2019 to $149 million from a year earlier. The data shows that there were just nine private equity deals in the time period, which is down from 13 years ago.

  • Continued unrest and protests in Hong Kong are hurting its reputation as the main physical gateway of gold to China, which is the world’s largest consumer. Reuters reports that the geopolitical situation is spooking tourists and subduing jewelry sales due to concerns of how to ship gold out of the city. J. Robart & Co., A Hong-Kong based bullion house, said that “on the individual investor level, we see more clients opting to store their gold in what they consider as safer jurisdictions.”

Opportunities

  • The U.K.’s Royal Mint Ltd. is planning to launch a gold ETF in early 2020 in response to rising demand from investors. The Financial Times reports that this would be the first time in its history that the Royal Mint would offer a financial product traded on a stock exchange, and would be the first European sovereign mint to launch a gold-backed exchange-traded commodity. The ETF will be structured as an exchange-traded commodity (ETC), which is a debt security backed by gold stored in the mint’s vault.

  • Citigroup came out with a bullish prediction for gold. Analysts, including Aakash Doshi, said in a note this week that “we expect gold prices to trade stronger for longer, possibly breaching $2,000 an ounce and posting new cyclical highs at some point in the next year or two.” Citigroup says the bold price forecast is driven by factors such as lower nominal and real interest rates, escalating global recession risks, strong central bank gold demand and more.

  • On Wednesday President Donald Trump tweeted “the Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt.” President Trump has been critical of the Fed for not lowering interest rates faster, which he sees as necessary to boosting U.S. economic growth, reports Reuters. Historically, lower interest rates have been positive for the price of gold.

Threats

  • As discussed above, Citigroup thinks gold could soon top its record high and hit $2,000 an ounce. However, this would be bad for diamonds, according to Citigroup’s Barry Ehrlich. The analyst wrote that compared to gold, diamonds are an inferior store of wealth and are unlikely to benefit from investor flight from fiat currencies into safer havens. Ehrlich added that a weaker global and U.S. economy would hurt demand for diamonds, because a healthy diamond market requires a healthy middle-class consumer, reports Bloomberg.

  • CNBC’s Jim Cramer said this week that the migration of money from stocks to safe haven assets, such as gold and bonds, could reach a tipping point. On the Mad Money show, chart analyst Carley Garner says that it’s time for both bond and gold prices to come down, since the number of buyers are running out. Garner added that gold is reaching the overbought territory and that “overbought levels are usually the beginning of the end for a rally.”

  • The London Metal Exchange (LME) released plans to allow extended queues for loading out metals, which will enable warehouses to boost profits by holding metals for longer, but consumers will face higher costs as a result, Pratima Desai from Reuters reports. An aluminum consuming firm said “this will help the warehouses improve revenues, but for us it means more expensive metal.” This could potentially hurt consumption if prices rise for consumers.
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.