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Swot analysis: peak gold could be here sooner than you think

Commentaries & Views

Strengths

  • The best performing metal this week was gold, up 0.51 percent. Gold traders and investors are positive on future gold prices in this weeks’ Bloomberg survey. For the first time in a month the gold bulls outnumbered the combined bearish and neutral responses. ETFs added 39,919 troy ounces of gold to their holdings on Thursday, marking the 14th straight day of inflows, according to Bloomberg data. This year’s net purchases now total 10.3 million ounces. As seen in the chart below, holdings in gold-backed ETFs are near 2012 records, while the price of gold is taking longer to catch up. The yellow metal rallied the most in a month on Wednesday after U.S. private companies’ payrolls rose less than forecast, reports Bloomberg. This builds the case for the Fed cutting rates again this year.

  • For the quarter ended September 30, gold beat stocks. The yellow metal returned 3.8 percent while the S&P 500 returned just 1.7 percent. Plus, gold outperformed bonds with the Bloomberg U.S. Treasury Bond Index seeing a 2.4 percent gain. Gold had its fourth straight quarter of positive gains, which is the longest run in eight years. Palladium also shone, hitting a new record of $1,701.93 an ounce on Monday and returning almost 10 percent in the third quarter. Turkey continues to be a big buyer of the metal. The central bank’s gold holdings rose $196 million from the prior week, and are up 47 percent year-over-year.

  • In mining company news, Gold Fields Ltd. exercised its option to buy a larger stake in Cardinal Resources Ltd. Previously Gold Fields owned approximately 11.1 percent of outstanding Cardinal shares and now owns 16.4 percent, according to a company statement. Gold Fields operates mines in Ghana, where Cardinals’ shovel ready assets are.

Weaknesses

  • The worst performing metal this week was platinum, down 5.46 percent, with the majority of those losses coming in on the last day of the third quarter. India imported just 13.5 metric tons of gold in September, down from 93.8 tons a year earlier. This 86 percent year-over-year slump is significant, as India is the world’s second largest consumer of the metal. Higher gold prices have impacted buying, with gold futures in Mumbai rising 22 percent this year. However, demand is expected to rise in the 15 days before the Diwali festival, where Hindus consider it an auspicious time to buy gold for gift-giving. U.S. Mint data shows that American Eagle gold coin sales fell 8.3 percent in September from a month earlier, declining to 5,500 ounces.

  • Gold’s volatility hit highs this week as traders struggle to read conflicting market signals. A measure of 90-day volatility rose to the highest since February on Tuesday, trading within a range of $77.80, which is the widest five-day scope since late June, reports Bloomberg. Ever-changing updates in U.S.-China trade negotiations have been a big contributor to the metal’s price swings.

  • In a new sign of potential economic downturn, U.S. hiring missed projections and wage gains cooled in September even as the jobless rate fell to a half-century low. Bloomberg’s Katia Dmitrieva writes that “the jobs report caps a week of U.S. economic data that whipsawed stocks and sent already-low Treasury yields tumbling, led by a key manufacturing gauge that sank deep into contractions with the worst reading in a decade.”

Opportunities

  • According to Wood Mackenzie, peak gold supply is coming if miners do not increase their spending on exploration and find new resources. Analysts wrote in a note that “exploration budgets were slashed following the fall in gold price from the highs in 2011 and 2012 and they have since failed to recover.” Tighter supply supports forecasts of gold bulls such as David Roche, president and global strategist of Independent Strategy, who said that gold could hit $2,000 an ounce by year end.

  • Palladium has been the precious metal winner for almost four years and could have further to run. Spot prices are up 33 percent in 2019 and look poised to keep going as forecasts show the world will remain in deficit for the ninth year in 2020. Top miner MMC Norilsk Nickel PJSC sees the deficit continuing to widen due to a lack of mine investment. Sister metal platinum is finally starting to see prices rise, which should be positive for top miners Impala Platinum Holdings and Sibanye Gold Ltd. With metal prices rising, companies are luckily being cautious about spending. Miners are focusing on being more efficient and practicing smart capital discipline as they are aware that prices can easily take a turn.

  • Southeast Asia’s largest bank DBS Group is bullish on gold. Bloomberg reports that in the bank’s fourth quarter asset allocation report it recommends dividend shares and gold, in addition to stocks, which look attractive in the world of negative-yielding bonds. CEO Hou Wey Fook writes that “against the backdrop of an unpredictable tug-of-war between easy monetary policies and geopolitics, gold will be favored as an effective portfolio diversified and to enhance risk-adjusted returns.”

Threats

  • A Dutch pension fund is a growing example of conservative investors moving away from traditional assets to get a return. The Netherlands’ biggest pension fund is moving away from government bonds and into riskier assets in hopes of getting better returns as bonds are yielding less and less. Bloomberg writes that there is a boom in alternative assets such as private equity, property and infrastructure. Elliot Hentov, head of policy research at State Street Global Advisors, says “it’s a low-yield environment, everyone is piling in.” Perhaps more investors will pile into gold?

  • Last week news broke that the Trump administration was discussing ways to limit U.S. investors’ portfolio flows in China and potentially delist Chinese companies from U.S. stock exchanges. The threat here is that this kind of talk demonstrates the U.S. is not trying to actually make a deal with China to end the trade war. In an essay about the topic, Ray Dalio writes that the International Emergency Economic Powers Act of 1977 could empower the president to unilaterally impose capital and FX controls to deal with a threat from outside the U.S.

  • De Beers reported a 39 percent drop in its latest diamond sale and demonstrates why this is one of the worst years for the diamond industry in a long time, writes Bloomberg’s Thomas Biesheuval. The industry is suffering from an oversupply of polished gems. De Beers holds 10 sales events each year and sold just $295 million in its eighth sale of the year, according to the company on Thursday. RBC Capital Markets expects the company’s profit will drop by around 40 percent in 2019.
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