Gold Reacts To March Rate Hike Talk

March 6, 2017

Strengths

  • The best performing precious metal for the week was palladium up 0.39 percent.  Friday’s Commitments of Traders Report showed money managers increased their bullish positions over the past week. On Thursday the European Union reported consumer prices were 2 percent higher in February than a year earlier, reports MarketWatch. This is the highest rate of inflation in four years, and a pickup from 1.8 percent in January 2017. Europeans have been significant buyers of gold in recent months.
  • Provisional data from consultancy firm GFMS shows that India’s gold imports in February surged to 50 tonnes, reports Reuters. This is up more than 82 percent from a year ago, and should support global prices that are trading near their highest level in three-and-a-half months. “Pent-up demand on the ease of the cash crunch and wedding related demand lifted imports in February,” said Sudheesh Nambiath with GFMS.
  • Australia saw its highest gold production levels in more than 17 years, reports Kitco News, totaling 298 tonnes according to data compiled by mining consultancy firm Surbirton Associates. Production is up around 3.5 percent compared to last year and is the highest since 1999.  Australia has seen renewed interest in gold exploration and production as labor and other input costs have dropped in recent years.

Weaknesses

  • The worst performing precious metal for the week was platinum, falling 3.03 percent.  A story in Business Day reported mid-week that a new study indicated that South Africa should reconsider public ownership of the mining industry.  Gold is headed for its biggest weekly drop since November, declining for the fourth time in five days, reports Bloomberg. Gold prices fell as the U.S. dollar rallied following the Federal Reserve’s increased expectation for a March interest rate hike. New York Fed President William Dudley said earlier this week that the case for tightening had become a lot more compelling, while John Williams of the San Francisco Fed said he sees serious consideration for a rise at the March 14-15 meeting.
  • Sales of U.S. Mint American Eagle gold coins fell to a 14-month low, reports Reuters, while silver coin sales were also sharply lower last month. The U.S. Mint sold 27,500 ounces of the gold coins in February, down 67 percent from last year. Despite analysts expecting nervousness ahead of elections in the Netherlands, France and Germany to help the gold price this year, new expectations for higher U.S. interest rates could provide a source of pressure, the article continues.
  • Chinese gold imports from Hong Kong slid in January, reports Platts.com. January gold imports totaled 32 metric tons (mt), down 40 percent from December and reaching a two-year low. Combined imports for January stand at 50 mt, down 35 percent year-over-year.

Opportunities

  • Mark Bristow, Chief Executive of Randgold Resources, announced during the company’s annual results presentation that more cash would be returned to shareholders over the next few years. At a gold price of $1,200 an ounce, the company expects to generate as much as $1.7 billion by year-end 2021, reports Moneyweb, which could be returned to shareholders. “This would represent a step change in the quantum of dividends paid.”
  • INTL FCStone Inc.’s London-based subsidiary has unveiled its physical trading platform for the global bullion market called PMXecute+, reports BankingTech.com. “It’s simply automating our interaction with our customers – improving market access and efficiency – through one platform,” said Barry Canham, global head of precious metals at INTL. Suppliers can anonymously create firm or indicative offers on the platform for all customers to view, the article continues. And if they like what they see, the customers can trade on these, thus seamlessly securing gold at a price and a location they want the bullion to be stored at.
  • Gold ETFs are either too optimistic, or in it for the long-term, reports Bloomberg. Gold ETF holdings are almost 8 percent above the four-year average, despite the underlying metal being right at the average. Bloomberg adds that silver ETFs are increasingly utilized for longer-term buy-and-hold vehicles since they are less widely traded and more efficient to store. Silver ETF holdings remain near 2013’s record high of 646 billion ounces. In addition, according to UBS, white metals tend to benefit from positive growth and risk given their links to economic activity via industrial demand. Silver has been outperforming gold so far this year, with the gold/silver ratio gently drifting lower, UBS continues.

Threats

  • As you can see in the chart below, a slump in the price of gold is due to “a firmer U.S. dollar and significantly higher rate hike expectations in the U.S.,” said Eugen Weinberg of Commerzbank AG. New York Fed President William Dudley said the case for tightening monetary policy has become “a lot more compelling.” However, one question remains. Will the Fed really choose to hike interest rates around key European elections that have the potential to cause significant moves in the euro?

  • In quite the Donald Trump fashion, Tanzania has banned the export of unprocessed metals and ordered mining companies to begin smelting or refining their production to help boost state revenue and create jobs, reports Bloomberg. “The ban intends to make sure that mineral value-addition activities are carried out within Tanzania,” the ministry said. Acacia Mining, which produces all of its gold from three mines in the country, dropped as much as 20 percent on the news, the most since March 2014.
  • Franco-Nevada’s David Harquail thinks that gold miners are running to stand still, reports Bloomberg. “In my mind, the industry is ex-growth,” said Harquail. He believes that producers will be faced with options that are unlikely to boost global gold production or lower the sector’s overall costs. Franco-Nevada currently has 94 percent of its holdings in precious metals, but Harquail says the company plans to do more deals in the non-precious metals space, with a particular focus on oil and gas, the article continues, perhaps with fewer royalty contracts being available to the mining sector.

Courtesy of http://usfunds.com/

Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. Under his guidance, the company’s funds have received numerous awards and honors including more than two dozen Lipper Fund Awards and certificates. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal. He is also the co-author of “The Goldwatcher: Demystifying Gold Investing.” Mr. Holmes is engaged in a number of international philanthropies. He is a member of the President’s Circle and on the investment committee of the International Crisis Group, which works to resolve conflict around the world. He is also an advisor to the William J. Clinton Foundation on sustainable development in countries with resource-based economies. Mr. Holmes is a native of Toronto and is a graduate of the University of Western Ontario with a bachelor’s degree in economics. He is a former president and chairman of the Toronto Society of the Investment Dealers Association. Mr. Holmes is a much-sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC, Bloomberg and Fox Business, and has been profiled by Fortune, Barron’s, The Financial Times and other publications.  Visit the U.S. Global Investors website at http://www.usfunds.com.  You can contact Frank at: editor@usfunds.com.

14 karat gold is 58.5% pure gold