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Gold SWOT: Total Gold Held By ETFs Has Risen 7.4% So Far This Year

CEO & Chief Investment Officer @ U.S. Global Investors
June 27, 2022

Strengths

  • The best performing precious metal for the week was palladium, up 3.41%, perhaps on news that Sibanye says its Stillwater Mine could be idle for up to six weeks after the Yellowstone flooding. Gold has largely held firm this week as the dollar and bond yields sank on growing concerns about an economic downturn, reports Bloomberg. This comes after Federal Reserve Chair Jerome Powell vowed to curb inflation and said that a recession could be a possibility. With markets still focusing on central bank tightening to contain price pressure and the impact of those actions on global growth, the yellow metal has been holding in a narrow range this week, the article continues.

  • Exchange-traded funds (ETFs) added 334,758 troy ounces of gold to their holdings in the last trading session, bringing this year's net purchases to 7.27 million ounces, according to data compiled by Bloomberg. This was the biggest one-day increase since April 13. The purchases were equivalent to $615.8 million at the previous spot price. Total gold held by ETFs has risen 7.4% this year to 105.1 million ounces.
  • RBC sees the proposed Kumtor agreement as removing a significant overhang for Centerra Gold shares and increasing management's near-term flexibility in terms of funding growth post-2024 and potential additional cash return. The terms of the agreement are materially unchanged, with the Kyrgyz government transferring the 77.4 million shares it controls for cancellation, in exchange for Kumtor. Centerra Gold will also make cash payments totaling $87 million for withholding taxes and to settle inter-company claims.

Weaknesses

  • The worst performing precious metal for the week was platinum, down 2.85% on little news. Gold miner Dacian Gold has spent years trying to engineer a turnaround story after it struggled in the early days at its $200 million Mt Morgans gold mine, reports Stockhead.com. Unfortunately, high inflation has forced the company to scale back. “In light of the current high inflationary environment, the board has taken the decision to reset the company strategy by discontinuing the current open pit mining operations at Mt Morgans,” Dacian chair Mick Wilkes said.
  • Russia’s government and parliament are seeking to change rules on the sales and management of the country’s precious metals and gem stockpiles amid the war with Ukraine. The Finance Ministry proposed this week to put a portion of the country’s precious metals and gems into a special reserve that can be accessed in times of war, according to the government documents website. If the proposal passes, the president will have more rights to decide what to do with those reserves.
  • Switzerland has imported gold from Russia for the first time since the invasion of Ukraine, showing that the industry’s stance toward the nation’s precious metals may be softening. More than three tons of gold was shipped to Switzerland from Russia in May, according to data from the Swiss Federal Customs Administration. That is the first shipment between the countries since February. The shipments represent about 2% of gold imports into the key refining hub last month.

Opportunities

  • Yamana Gold’s executive chairman Peter Marrone expects shareholders of Gold Fields to come around to the deal’s benefits. “It will become very obvious that this is two pieces of a puzzle that fit nicely together.” Mr. Marrone went on to say, “The more I learn of what their shareholders are asking in terms of information — and the little bits of what they do reveal in terms of where they’re leaning — it certainly suggests to me that they see it just as compelling for them as it is for the shareholders of Yamana.” Shareholder votes are expected in the third quarter of 2022. Gold Fields is required to secure 75% of shareholder support for deal approval whereas Yamana requires about 67%.
  • With an elevated cost of capital for developers, royalty/streaming companies are a relevant alternative for project financing. While part of the developer strategy is typically to look at value crystallization through being acquired, the mismatch between junior equity valuations and the robust nature of the majors at current metal prices make this dynamic even more poignant.
  • According to Stifel, miners are poised to deliver outsized capital returns to shareholders through dividends and share buybacks over the coming years. The phase of deleveraging following significant investment in growth over a decade ago is nearing completion. Investing in new growth has been a challenge and continues to face obstacles, further bolstering balance sheets. This leaves dividends and buybacks, and the next destination for excess cash, sitting idle on the balance sheet. While the larger miners in their analysis are already paying an attractive average dividend yield of 5%, they see room for higher returns (dividends and buybacks) in the coming years as buoyant commodity prices and a lack of sizable growth opportunities create an ideal scenario for heightened shareholder returns.

Threats

  • Angola has seized a stake in the nation’s biggest diamond miner, reports the Financial Times, giving it majority control of one of the world’s largest gem firms in a move that marks the waning influence of Chinese investors in the southern African nation. Catoca owns the world’s fourth-largest diamond mine. Catoca’s owners include Russia’s Alrosa, the world’s biggest diamond miner and subject of U.S. sanctions, Angolan state diamond company Endiama and until recently, LLI International.  With the takeover of the Catoca stake, “the government is trying to reassure investors that they are cleaning up the sector” and demonstrate its efforts to cut ties with China Sonangol, said Alex Vines, Africa program director at Chatham House and an Angola expert.  
  • Sibanye Stillwater says resumption of mining at Montana-based operations affected by flooding in the area could take up to four weeks, according to a company spokesman.  It could take at least a month to repair access roads and bridges linking to Stillwater’s East and West operations, James Wellsted said.  The East Boulder mine is operating normally; revised output guidance will be disclosed once repairs to damaged infrastructure are complete. 
  • According to Morgan Stanley, gold looks overvalued versus recent moves in real yields. However, some support is coming through from still strong inflation and rising risks of recession, and sentiment could turn if rate expectations start to reverse.

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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: [email protected].


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