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Swot analysis: South Africa's gold output fell for a 24th straight month

Commentaries & Views

Strengths

  • The best performing metal this week was silver, up 1.02 percent on little news. Gold traders and analysts were mostly bullish on their outlooks for gold next week despite lower prices. Fifty-three percent of respondents were bullish in the weekly Bloomberg survey. Serbia bought nine tonnes of gold in October and the metal now accounts for 10 percent of the nation’s foreign reserves. Serbian central bank governor told reporters that “Serbia is safer today” now that it bought more gold. Bloomberg reports that the purchase is one of many moves by the country to shore up its financial stability by changing the structure of its foreign debt.

  • Gold prices are down from recent highs, but that doesn’t mean investors are giving up. Open interest is still rising, showing that lower prices are driven by new short-sellers rather than by long investors liquidating. Another potential catalyst for the yellow metal is President Donald Trump pushing the Federal Reserve to deploy negative interest rates, which are positive for gold.

  • Although not the greatest news for miners, South Africa’s gold production fell for a 24th straight month in September for the longest streak of decreases since 2008, according to Statistics South Africa. Tighter supply of the metal could push prices higher. Output of platinum-group metals also fell for the month by 2 percent.

Weaknesses

  • The worst performing metal this week was palladium, down 1.75 percent following strong gains in September and October. On Monday, contracts equal to 3 million ounces of gold changed hands in just 30 minutes fueling a selloff. Bloomberg reports that this was triple the 100-day average of contracts traded during the time of day. As a result, gold fell as low as $1,448.90 an ounce. Selling continued throughout the week with the largest gold-backed ETF, SPDR Gold Shares, seeing its biggest outflow in three years.

  • Semafo’s Boungou gold mine in Burkina Faso remains closed as the area continues to be secured after an attack last week. The company’s CEO said that the death toll has risen to 39 after a convoy of workers was attacked. According to the International Crisis Group, artisanal gold miners in West Africa’s Sahel zone have become a source of financing and recruits for Islamist militants. The group said in a report that “the main jihadist groups in the Sahel benefit financially from gold extraction – an activity that they consider lawful.”

  • Turkey’s central bank gold reserves fell $397 million from the previous week to now total $26.6 billion. According to central bank data, reserves are still up 41 percent year-over-year. U.S. core inflation unexpectedly slowed down in October despite a new round of tariffs on Chinese goods. The core consumer price index (CPI) rose 2.3 percent from a year earlier. Slowing inflation can be negative for gold prices.

Opportunities

  • Growing electric vehicle demand could fuel the palladium deficit and push prices higher as the precious metal is a key component in building cars. Daimler said that electric vehicles are expected to constitute 15 percent of its car portfolio by 2021 from just 2 percent in 2019. Bloomberg’s Elena Mazneva writes that palladium has risen by more than any other major commodity over the past year and its recent pullback doesn’t spell an end to the rally since it is driven by demand for autos. South Africa’s platinum union agreed to a wage deal with miners and broke a deadlock that threatened to disrupt the industry. Reaching an agreement quickly demonstrates that South Africa is striving to be the most reliable supplier of choice of platinum group metals.

  • According to a statement from Lundin Gold, the company has received a key permit for its Fruta del Norte gold project in Ecuador. Lundin says the project can now move forward toward production this quarter. The mine will provide $1.96 billion to the Ecuadorian state through taxes and royalties through 2034 and will have a mine lifetime of 15 years.

  • UBS published a survey of over 3,000 family offices showing that they are now holding 25 percent of assets in cash. The survey says that almost 80 percent of the offices are expecting volatility to increase and more than half are expecting a significant selloff in equities in the months ahead. Since the yield on bonds are so low, other assets such as gold may benefit if cash is shifted to gold to diversify away from the stock market.

Threats

  • Billionaire investor Ray Dalio warned investors of a capital war between the U .S. and China as some lawmakers work to pressure a slowdown in the flow of money from U.S. pension and investment funds into Chinese companies. “There is a trade war, there is a technology war, there is a geopolitical war, and there could be a capital war. How that is approached is going to determine our futures,” said Dalio on Thursday. However, sentiment was largely positive this week on a possible trade deal between the two superpowers.

  • We are now entering tax loss selling season and it could spell big volatility for Canadian equities. Bloomberg reports that energy and pot stocks are among the biggest losers in Canada’s stock market this year and are prone to further weakness as investors sell low to reduce their tax bills. Perhaps some of that money could flow into junior miners.

  • A World Gold Council (WGC) survey shows that just 12 percent of China’s generation Z intend to buy gold jewelry in the coming year, which is lower than the millennial generation and people over 39 years old. China is the world’s top buyer of the metal, and changing tastes between generations could hurt overall demand.
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.