Analysis: Momentum Is Building

January 7, 2019

Strengths

  • The best performing metal this week was platinum, up 4.05 percent, hitting a five-week high and puncturing through its 20-day moving average and is likely following gold to a higher relative valuation. Gold traders and analysts surveyed by Bloomberg have been bullish for eight consecutive weeks as the gold price heads toward $1,300 an ounce. As equity markets remain turbulent, gold is headed for a third weekly gain as investors are seeking perceived safe-haven assets. Investors have also been buying up silver as the white metal hit its highest level since July on Thursday. Naeem Aslam, chief market analyst at Think Markets U.K., told Bloomberg that it “looks like silver has gained momentum because of gold.”
  • The yellow metal finished 2018 with its best quarter since March 2017 amid stock market volatility and the partial U.S. government shutdown. Bloomberg writes than in contrast, the S&P 500 saw its worst fourth quarter decline in a decade and the first negative annual return since 2015. Another case for gold bulls is that China’s PMI fell to 49.4 in December, which is lower than expected and below the 50 level that signals growth. ETFs added 75,380 troy ounces of gold to their holdings on Friday, marking five straight days of increases.
  • Global head of precious metals sales at UBS, Edel Tully, wrote in a note this week that current gold buying interest pales in comparison to gold buying from 10 years ago. She writes that gold buying isn’t broad-based right now, but that it is slowly widening and momentum is building. Turkey’s gold reserves continue to climb each week. The central bank’s holdings rose $129 million from the previous week and are now worth $20 billion as of December 28, according to official figures from the central bank in Ankara.

Weaknesses

·         The worst performing metal this week was gold, but still up by 0.32 percent.  A gauge of U.S. manufacturing, the Institute for Supply Management index, fell to a two-year low of 54.1 this week, below expectations and marking the largest drop since October 2008. Gold futures declined on Friday after U.S. payroll data was released showing a rise of 312,000 in December. Average hourly wages rose 3.2 percent from a year earlier, which was by more than expected and the fastest pace since 2009. However, if you look closer, the data shows that the bulk of new jobs in December went to the oldest set of workers, those 55 and older. The prime age group, those aged 25-54, actually declined by 11,000 in December. Although the stock market liked the “strong” number it’s likely a head-fake considering the broad based weakening economic data seen earlier in the week.

·         Commodity ETF inflows declined by 37 percent this week, according to Bloomberg data. Precious metals ETFs also saw inflows slow, with $468 million of gains, versus $934 million the previous week. Higher gold prices might be slowing Indian gold buying. Reuters reported that Indian discounts widened to a two-month high due to gold’s price surge.

·         Guyana Goldfields shareholders are not happy with management. The company said this week that it will review an official request for a special shareholder meeting made by investors who are concerned about performance. The investors say they want a meeting to replace the board of directors, which is the latest of several recent actions in the mining industry as a whole.

Opportunities

·         Merrill Lynch research analyst Michael Jalonen writes that the outlook for gold in 2019 is very promising, with the potential to reach $1,400 per ounce by the end of the year. This could happen due to U.S. twin deficits and China easing monetary policy. Barrick Gold’s new CEO says that shakeups in the gold industry are just starting. Mergers that made a big impact, such as the Barrick-Rangold Resources one last year, are just the beginning. Mark Bristow, who became the CEO after the merger, said in an interview with Bloomberg that “without a doubt, the industry needs transformation” and that “we believe we have started that.”

·         Continuing the Merrill Lynch outlook from above, Jalonen writes that key themes in the gold market could be growth in free cash flow (FCF) and industry consolidation. He predicts that royalty and streaming companies will continue to generate robust FCF and pursue new deals to pay higher dividends. Additionally, the production weighted all in sustaining cost (AISC) is forecast to decline by 6 percent, to just $876 per ounce in 2019.

·         Robert Kaplan, president of the Dallas Federal Reserve Bank, said this week that the U.S. central bank should pause rate hikes while it monitors the impact of tighter financial conditions and decelerating growth abroad, writes Bloomberg. Could there even be an interest rate cut coming? Bloomberg writes that bond traders have now fully priced in a cut by April 2020. The near-term forward spread, which shows the difference between the forward-rate implied by Treasury bills six quarters from now and the current three-month yield, fell below zero for the first time since March 2008, writes Bloomberg News. The gauge is seen as a proxy for traders’ outlook on Federal Reserve policy and implies that monetary policy easing is expected.

Threats

·         DoubleLine Funds’ Jeffrey Gundlach weighed in on Apple’s recent revenue warning this week, reports CNBC, noting that this is the “kind of stuff that happens in a bear market.” In fact, Gundlach correctly called in mid-December the new lows witnessed in the stock market that came at the tail end of the year. For investors interested in buying the dips, Gundlach might be on to something here.

·         As the threat of a synchronized global economic slowdown has pushed investors to government bonds for their perceived safety, Mark Gilbert writes for Bloomberg that “once again, shorting government debt is proving to be a widow-making trade.” The amount of negative-yielding debt has climbed by over 46 percent in the past three months, which is about to trash returns from shorting government bonds, the article continues. According to Hedge Fund Research, hedge funds have collectively lost more than 7 percent last year which makes this the industry’s worst year since 2011.

·         Two years ago the government of Zimbabwe decriminalized gold digging in the country, reports a local news agency. However, this freedom has led to a surge in violence by robbers and mining mafia, with many miners now carrying machetes for self-defense. One artisanal gold miner who searches for the yellow metal in the disputed Gaika mine says that carrying a machete makes the difference between life and death, and success and failure, the article reads. He started carrying one after witnessing fellow miners being robbed of “their hard extracted gold ore in broad daylight.”

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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.

Gold is found in nature in quartz veins