Gold Price Stood Up To Market Volatility

November 26, 2018

Strengths

  • The best performing metal this week was gold, up 0.14 percent. The Bloomberg Intelligence Global Senior Gold Valuation Peers Index is heading for a fourth straight gain to mark the longest rally since September. The index posted its first monthly gain in seven months in October as investors are giving gold equities a second look now. Bloomberg’s Susanne Barton writes that gold equities are benefitting as investors bet that signs of a cooling global economy might mean gold prices have finally reached a bottom.
  • The stock market faced some of its worst days in years this week. On Tuesday, the S&P 500 Index erased all of its gains for 2018, oil fell to a one-year low and bitcoin has been in freefall. Amid this turmoil, traditional safe haven assets such as Treasuries, the yen and gold stood still. On Monday, gold actually gained slightly, demonstrating its ability to hold up against stock market volatility.
  • Bloomberg reports that holdings in ETFs backed by gold climbed to a 14-week high this week. The money plowed into ETFs on Monday after gold futures posted their biggest weekly gain in more than a month. Since this rate-hiking cycle started back in late 2015, holdings in gold ETFs have climbed 50 percent while the metal price is up 15 percent. Central banks, too, are buying up the yellow metal. Russia boosted its gold holdings in October to 66.4 million troy ounces, valued at $81.1 billion, up from $77.5 billion in September. Kazakhstan also increased its holdings in October to 10.97 million ounces, up from 10.77 million the prior month. Turkey, which has been selling their gold for six months, appears to have increased its holdings last month to 15.16 million ounces. Lastly, Malaysia added to its bullion stores for the first time since January 2017, to bring holdings up to 1.25 million ounces, the highest level since 1999.

Weaknesses

·         The worst performing metal this week was palladium, down 4.46 percent with a slide removing much of last week’s surge. UBS writes that gold positioning turned net short again after a four-week breather. Data shows that gold shorts re-established positions, accounting for the bulk of the selling.

·         The civil lawsuit accusing JPMorgan of manipulating the precious metals market might be in for more delays. The Justice Department has asked a judge to halt the proceedings in the lawsuit filed in 2015 by a hedge fund manager and two commodity traders. They are asking for a six-month delay, citing an ongoing criminal case as the reason for the request, according to court filings. Last month a former JPMorgan trader pleaded guilty in Connecticut to manipulation charges, writes CNBC.

·         London’s gold market is not as big as some thought. Last week London Bullion Market Association data showed that an average of $36.9 billion of gold changed hands in London’s over-the-counter market. Previous estimates from the World Gold Council (WGC) were between three and six times higher, using 2016 data. Bloomberg writes that while the data was only for a single week, it does demonstrate that the Comex futures market in New York is in fact a bigger venue for gold than London. However, more gold was traded in London than was traded on the FAANG stocks – Facebook, Apple, Amazing, Netflix and Alphabet. Bloomberg writes that almost $37 billion of gold was traded on average last week, which is 27 percent more than the volume for the largest technology stocks.

Opportunities

·         President Donald Trump continued to call for the Federal Reserve to lower interest rates, describing the central bank as a “problem.” This criticism comes during a week when stocks stumbled on concerns ranging from slower global growth to an expanded trade war. However, MNI reports that the Fed might actually be considering a pause to its gradual monetary tightening and could end its cycle of interest rate hikes as early as next spring. Lower interest rates could be a tailwind for the gold price.

·         Citigroup estimates that the U.S. dollar will weaken next year as the economic boost from fiscal policy wanes and rising interest rates will begin to hurt. One analyst wrote that “our view is that the fiscal support to growth eventually fades in the U.S. and tighter monetary policy starts to bite.” Goldman Sachs also sees the dollar declining in 2019 as the U.S. growth boom “catches down” to the moderate pace of expansion in the rest of the world. Gold historically moves in the opposite direction of the dollar. The bank also says it might be wise to dial back on risk and boost cash positions. Goldman strategists led by David Kostin wrote in a report that “cash will represent a competitive asset class to stocks for the first time in many years.”

·         Ray Dalio, founder of Bridgewater Associates, sees parallels in the financial markets today to the 1930s of being in the late stages of a short-term business cycle, given that the Fed is tightening monetary policy. Dalio said “the role of the U.S. dollar will diminish, and the returns on U.S. dollar-denominated debt will suffer.” The billionaire investor recommends that investors consider placing 5 to 10 percent of their assets in gold as a hedge against political risks.

Threats

·         Investors withdrew $3.9 billion from macro hedge funds in October, with macro funds falling an average of 1.7 percent on an asset-weighted basis. Overall the hedge fund industry saw $7.1 billion of outflows in October, bringing total redemptions for the year to around $10.1 billion, writes Bloomberg. For the first time since 2008, high-yield and investment-grade notes in both euros and dollars are headed for negative returns at the same time, based on Bloomberg Barclay’s indexes. Credit markets are set for their worst year since the global financial crisis and Marco Stoeckle, head of corporate credit strategy at Commerzbank AG said that “most people have buried hopes for a year-end rally.”

·         Proposed changes to the Mexican Mining Code hit the share prices of those companies with operations in the country.  Some of the latest proposals center around mining concessions that impact indigenous areas and their environmental and social impact.  While it is still too early to know how these proposals will play out, investors immediately placed a higher discount on these companies.

·         The Organization of Petroleum Exporting Countries (OPEC) could be facing a big challenge next year as Permian producers expect to iron out distribution problems that will add three pipelines and as much as two million barrels of oil a day, writes Bloomberg. Javier Blas writes that “if Saudi Arabia and its allies cut production to keep prices higher, shale will thrive, robbing them of market share. But because the Saudis need higher crude prices to make money than U.S. producers, OPEC can’t afford to let prices fall.”

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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 still being mined and refined at the rate of almost 2,600 tonnes per year.