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Swot analysis: gold's best week in five

Commentaries & Views

Strengths

  • The best performing metal this week was platinum, up 3.96 percent. Gold is back with a weekly gain and its best week in five, trading above $1,500 an ounce on hopes that the Fed will cut borrowing costs next week. The yellow metal also benefitted from haven demand due to geopolitical turmoil from Chile to Lebanon, plus volatility surrounding Brexit negotiations. Holdings in gold-backed ETFs have increased 16 percent so far this year. On Monday alone, ETFs added 82,176 troy ounces of gold to their holdings, according to data compiled by Bloomberg. Silver also had a strong week, up 2.79 percent on an improved industrial demand outlook, reports Kitco News.

  • In a big surprise, Germany’s central bank bought gold for the first time in 31 years. Reserves climbed to 108.34 million ounces in September, up from 108.25 a month earlier, and the first change since 1988. International Monetary Fund data shows that Turkey also increased reserves in September, rising to 17.29 million ounces from 16.49 million ounces a month earlier.

  • Several miners reported strong third quarter results this week. Agnico Eagle Mines beat expectations and reported quarterly net income of $76.7 million, up significantly from the same time last year of $17.1 million in net income. The company said it had record gold production of 476,937 ounces. Hochschild Mining also reported stronger production, with output rising 9 percent in the third quarter to 67,797 ounces. Yamana Gold reported net free cash flow of $99.9 million due to higher gold prices and declared a fourth quarter dividend of $0.01 per share, which is a 100 percent increase.

Weaknesses

  • The worst performing metal this week was palladium, up 0.60 percent. Pre-Diwali sales of gold and silver in India fell as much as 40 percent as high prices and lower consumer spending hits, reports the Economic Times. The Confederation of All India Traders (CAIT) said “there was a decline of business from 35 to 40 percent which is a cause of major worry for the traders.” Falling demand out of India is a concern, as it is the world’s second largest consumer of gold.

  • Joe Foster, portfolio manager and strategist at VanEck, says that market complacency is to blame for disrupting gold’s rally. In a phone interview with Bloomberg, Foster said “until the market loses that complacency and there’s less risk sentiment, that’s when gold really takes off.” Foster says we’re at the point of a potential full blown recession and that “something’s got to give at some point.” Bloomberg’s Sungwoo Park is bearish on gold in the near-term, writing that “the metal will struggle to find a way back up from here for some time” due to rising real yields, which reduce the appeal of non-interest paying bullion.

  • As some miners reported strong third quarter results, others disappointed. Fresnillo Plc reported a fall in output in the third quarter due to lower grades, saying that silver production fell 14.5 percent and gold production fell almost 7 percent. Glencore reported a 4 percent drop in copper output so far this year and trimmed its full-year guidance as it plans to suspend some operations in the Democratic Republic of Congo.

Opportunities

  • Calibre Mining Corp., which bought two gold mines in Nicaragua from B2Gold Corp., was added to the S&P/Toronto Stock Exchange Composite Index, reports Bloomberg News. Company executives are hoping to build “a profitable, ETF-qualifying gold business that generates significant free cash flow.” B2Gold has a 31 percent equity ownership stake in Calibre. 

  • The World Gold Council (WGC) published a report this week highlighting the gold sector’s carbon footprint and steps the industry can take to become net-neutral. Chief Financial Officer Terry Heymann says “it’s not an easy path right now but it’s feasible for mining companies to play their role and operate with net-zero emissions. It’s only going to get easier as technology advances.”  The report highlights the cheaper costs of green energy and that in some cases diesel generation products can be more volatile in price. Several companies have announced green initiatives at mines and often highlight what they’re doing to combat climate change in presentations to investors.

  • Sprott Inc. CEO Peter Grosskopf says this time gold’s rally is different because monetary policy has reached the point of being ineffectual. “Gold’s 2019 performance is quite different than prior rallies in that the gold market is no longer small and gold is no longer seen as a fringe asset.”  Grosskopf added that “the Fed is in checkmate and gold is now a mandatory” portfolio holding. Australia & New Zealand Banking Group is also bullish on the yellow metal, saying that it could hit $1,700 an ounce in the next six months, citing expected changes in U.S. interest rates.

Threats

  • The House Natural Resources Committee voted on Wednesday giving preliminary approval to update a 147-year-old hardrock mining law that was signed by President Ulysses S. Grant in 1872. The Hardrock Leasing and Reclamation Act would protect national parks and tribal areas from being leased for mining, increase mining royalties and create a fund to clean abandoned mines. Bill proponents say it brings mining into the 21st century, while critics say that it will do major harm to mining companies. Cronkite News reports that the bill would impose a minimum 8 percent royalty on mineral production at already existing mine sites and a 12.5 percent royalty on mines with permits issued after the law takes effect.

  • Bloomberg’s Katherine Doherty reports that it’s beginning to look a lot like 2009 based on a key indicator of credit. According to S&P Global Ratings data, upgrades of U.S. companies in the high-yield market are trailing downgrades by the most since 2009. Plus, the number of risky credits is on the rise and hit a 10-year high in September with 263 companies rated B- or lower.

  • Violent anti-government demonstrations and work strikes in Chile are disrupting the mining industry. Chile, the world’s largest copper producer, is facing delays and supply shortages at many of its mines. Antofagasta Plc, which has four mines in the country, said it could cut its production by 5,000 tonnes. Reuters reports that several of the world’s largest miners, such as BHP Group, Anglo American and Teck Resources, have operations in the nation that also mines gold and silver.
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