The Gold Rally Is Looking Good

Strengths

• The best performing precious metal for the week was gold, followed by silver.  Gold traders and analysts are bullish for a 12th straight week, reports Bloomberg, as the yellow metal is on its way to the highest price in a year. With tensions from North Korea, coupled with a weaker U.S. dollar, volume on the COMEX in New York hit a record in August. Some 6.55 million contracts, worth nearly $900 billion now, changed hands last month. Bob Savage, CEO of Track Research, cites North Korea as the biggest investor worry right now and believes that “the safe-haven to watch into this mess remains gold.” In addition, last week investors poured $1 billion into the largest ETF backed by bullion, Bloomberg reports.

• U.S. jobless claims jumped by the most since 2012, reports Bloomberg, and in combination with dollar weakness, sent gold surging to a one-year high. Mid-week, the yellow metal remained little changed as President Trump agreed to a three-month debt limit extension, along with Federal Reserve Vice Chairman Stanley Fischer resigning.

• India is planning for a new spot gold exchange in November, reports Scrap Register and Sharps Pixley. The new exchange should boost transparency, help measure inspection and repair a fragmented jewelry industry. Currently in India, gold is traded on exchanges as futures only. According to the article, earlier in 2013, authorities halted trading on the National Spot Exchange, and since then spot gold hasn’t been trading in the spot market.

Weaknesses

• The worst performing precious metal for the week was palladium, off 2.45 percent on little news.  On the prior Friday, palladium jumped 4.77 percent, so the losses that started earlier this week may have been some profit taking post the strong surge in prices the prior week. 

• China’s gold reserves at the end of August were 59.24m fine troy ounces, reports Bloomberg, unchanged from July’s reserves of 59.24m fine troy ounces. The People’s Bank of China reported the latest numbers on its website this week.

• In a budget briefing this week, state Treasurer Ben Wyatt announced that Western Australia will increase the royalty rate on gold producers to 3.75 percent from 2.5 percent, reports Bloomberg. Wyatt says higher royalties will help repair the state’s budget. According to the article, the new rate will apply when the gold price is above $1,200 an ounce. Based on the current gold price, producers will pay additional royalty of ~A$20. Miners are calling this a “baffling cash grab” with serious and unintended consequences.

Opportunities

• More than $2 billion has been raised this year through initial coin offerings (ICOs), reports Bloomberg, and nearly 200 other ICOs are planned in the next four months. Mark Mobius is sensing danger in the explosive growth of cryptocurrencies, saying that digital currencies are beginning to get “out of control.” According to Mobius, however, a crackdown on this sector could mean a rush to gold. Just this week, bitcoin prices plummeted in the U.S. when Chinese regulators announced the closure of domestic trading platforms of cryptocurrencies and deemed ICOs and related activity illegal.

• Mike McGlone of Bloomberg Intelligence writes this week that the gold rally we are experiencing now is quite tame based on similar historical conditions. He comments that if this is a gold bull market, so far it is underwhelming. One of the key macro drivers of the yellow metal is the changing value of the U.S. dollar, so unless the greenback sustains a reversal of its 2017 direction soon, history indicates that gold prices have plenty of room to increase.

• About two years ago, the fear of a lithium shortage nearly tripled the price of the metal to over $20,000 a ton in just 10 months, reports Bloomberg Businessweek. All of a sudden, a spike in the market for electric vehicles caused competition with laptops and smartphones for lithium ion batteries.  In fact, electric car production is expected to increase more than thirtyfold by 2030. While the miners struggle to increase supply, another company that has a patented process delivering a better internal structure to the lithium cathode material for batteries, may have the edge on supply chain.  This is where Nano One comes in. According to a note from the company, “its technology could reduce costs by up to 50 percent ($/kWh) delivering robustly structured cathode materials that last two to three times longer, store more energy and deliver more power. Earlier this year Nano One’s updated the market on its proprietary process of producing high voltage spinel structured lithium cathode, without adding costly cobalt to the mixture, which could be the next generation of high powered batteries. For electric vehicles, this could translate into fewer battery cells, less weight, less cost extended range, longer lifetime or better warranties.”

Threats

• China is preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold, the Nikkei Asian Review reports. This could potentially create the most important Asian oil benchmark and allow oil exporters to bypass the U.S.-dollar denominated benchmarks by trading in yuan. “To make the yuan-denominated contract more attractive, China plans the yuan to be fully convertible in gold on the Shanghai and Hong Kong exchanges,” the article continues.

• With the rise of cryptocurrencies, wealth could take on an entirely new meaning for many young investors. According to one Bloomberg article this week, bitcoin is the new gold for Indian millennials. Saurabh Agrawal, co-founder of Zebpay, said over the phone: “How gold was considered wealth by grandparents, similarly bitcoin is now considered wealth for my sons.” It is the “new virtual gold of young Indians,” Argrawal explained, as the cryptocurrency’s impact is only just beginning to show.

• Analysts at Bank of America Merrill Lynch are warning that asset prices are getting “more bubbly” than in past periods of effervescence, reports Bloomberg. Central banks have plied markets with nearly $14 trillion of stimulus and pushed investors further out the risk spectrum to generate returns, the article continues. Alan Greenspan has said there’s a bubble growing across fixed-income markets and Remi Olu-Pitan of Schroder Investment Management agrees. She said the most dangerous spot is high-grade credit because that is where funds turn to for returns when they can’t make them in sovereign debt.

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