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Gold SWOT: A surge in gold prices is turning into a boon for bullion dealers

Commentaries & Views

Strengths

  • Going into the close, the best performing precious metal for the week was gold, but still off 3.27%. Ecuador's central bank bought about $158 million worth of gold for its international reserves from local producers and had it certified with an international refiner for good delivery. The holdings will diversify the bank's reserves and improve its financial position during uncertain geopolitical times.

  • Gold is playing its age-old role as a haven in times of wars and crises, and people all over the world are piling in, writes Bloomberg. Geopolitical tensions have sent the price of the yellow metal higher and retail investors everywhere, from Vienna to Singapore to New York, are flocking to the safety of gold. Silver prices are also higher this week on safe-haven demand and perceived bargain hunting.

  • The almost 10% surge in gold prices since the start of 2022 is turning into a boon for bullion dealers. Demand for bars and coins, especially in Western nations, hit 1,124 tons in 2021, according to the World Gold Council, the highest in a decade. That helped support prices at a time when institutional investors were not dipping in as much. Bloomberg reported Signet Jewelers Ltd., the owner of Kay Jeweler and Zales, sent shockwaves through the global diamond trade mid-week by telling suppliers they would no longer purchase stones mined in Russia, the world's largest supplier of diamonds.

Weaknesses

  • Going into the close, the worst performing precious metal for the week was palladium, down 10.88% as investors start to factor in the automakers switching back to platinum to avoid any purchases of palladium from Russia. Karora Resources Inc. said Monday that its adjusted earnings per share (EPS) for the fourth quarter of 2021 dropped year-over-year to $0.08 from $0.27. Analysts expected Karora's adjusted EPS at $0.09. Revenue declined to $67.0 million from $69.3 million due to lower average realized prices, missing consensus forecast of $68.0 million.

  • Russia spent years building a giant stash of gold, an asset that central banks can turn to during a crisis. But any attempt to sell it will now be a challenge just when it's needed most, reports Bloomberg. Bank of Russia's gold reserves is the type of asset it could sell to shore up the ruble, which has plunged as global economies isolate Russia following its invasion of Ukraine but doing so will be difficult with sanctions forbidding the U.S., the U.K. and the EU from doing business with the bank.

  • Sibanye Stillwater Ltd. halted work at its three gold mines in South Africa from Wednesday evening after workers began a strike over wages. The Johannesburg-based miner implemented a so-called "lockout," barring all workers, including those from the Solidarity labor union that accepted its wage offer, from accessing the sites, said spokesperson James Wellsted. Mining activities at Driefontein, Kloof and Beatrix mines were halted from Wednesday evening, except for essential services such as pumping water, he said.

Opportunities

  • Merger and acquisitions are starting to surface again, despite the volatile price action surrounding the Russian invasion of Ukraine. MAG Silver announced it has entered into a definitive agreement to acquire Gatling Exploration, a gold exploration company whose primary asset is the Larder Gold project located in the Abitibi greenstone belt of Northern Ontario, Canada. Larder is a past producing gold mine that hosts a global resource of 1.32 million ounces.

  • According to Jefferies, mining companies will outperform over the next three years as a result of consensus earnings upgrades and a rerating of their valuation. Jefferies noted that underinvestment in mine capacity, combined with decarbonization-driven demand and cyclical consumption growth, should lead to a tighter market and higher prices for some key commodities between now and 2025.

  • In a surprise move, AMC Entertainment and Eric Sprott are each investing $27.9 million in cash into Hycroft Mining Holding Corporation. Each Unit purchased consists of a share and a full warrant. CEO Adam Aron of AMC commented that it might not seem that a movie theater's core competencies would include running a gold or silver mine, but that AMC has had enormous success in navigating capital markets and bring that skill set to the mining professionals at Hycroft Mining. This transaction highlights that exploration and junior development companies are trading at prices where nobody cares, yet.

Threats

  • Palladium may also fall victim to accelerating inflation and a slowdown in global growth caused by the war in Europe. Automakers consume about 85% of the supply to make pollution-reducing catalytic converters in gasoline engines and may also hasten efforts to switch to the much cheaper platinum instead. "We continue to see very volatile and extreme price action in the first half of the year—with price risk to the upside," said Nicky Shiels, head of metals strategy at MKS PAMP SA. "But recession fears are rising with demand expected to be dampened into the second half," at which point the price risk switches heavily to the downside, she said.

  • In the meantime, as followed by IntelliNews, U.S. senators are now trying to cut Russia off from gold as a source of hard currency too, with new legislation introduced. Russia's gold reserves are estimated at about seventy-four million ounces ($150 billion), according to the CBR, now making up over a third of its entire reserves.

  • Gold's rapid rise to near record levels is unnerving some buyers in India, who are holding off on purchases, and worrying jewelers in the country's vibrant bazaars. Prices in India, the world's biggest consumer after China, have rallied in the past month in line with the overseas markets as investors sought safe havens following Russia's invasion of Ukraine. The country imports all the bullion it consumes, and costs are rising as the Indian currency trades near a record low. "Buyers have become very watchful of the price movement and only when a price level has been supported for a while will they return," said Tanya Rastogi, director at Lucknow-based Lala Jugal Kishore Jewelers. Sales at her company have dropped 25% in the past two weeks as the rally hurt wedding-related jewelry purchases and investment demand has slowed to a "dull crawl," she said.
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