What The Gold Futures Curve Could Be Telling Us

Strengths

•The best performing precious metal for the week was palladium rising 4.07 percent as Metals Focus sees a global deficit of about 680,000 ounces this year.  In addition, Norilsk Nickel PJSC noted this week that their first quarter production of palladium declined 14 percent.  Not to be forgotten, investors were loading up on gold through exchange-traded products, reports Bloomberg, pouring $487 million into SPDR Gold Shares on Wednesday. That was the biggest daily inflow into the world’s top bullion ETF in seven months. Escalating tensions between the U.S. and North Korea, along with noise around President Trump’s tax cut proposals, are spurring demand for safe-haven assets, the article continues. “There’s an appetite for storehouse of wealth at this point,” said Peter Sorrentino of Comerica Asset Management Group.

•Swiss gold exports increased 57 percent month-over-month in March to 140.3 tons, reports Bloomberg. Shipments to India rose to 55.6 tons from 37.9 tons in February, while exports to China also increased to 24 tons versus 22 tons the month prior. Similarly, China’s gold imports from Hong Kong jumped to the highest in 15 months, as buyers took advantage of a slump in gold prices in the middle of March, reports Bloomberg.

•All India Gems and Jewelry Trade Federation said in an email statement this week that it sees gold sales rising 20 to 30 percent on demand from “Akshaya Tritiya.” The festival is considered auspicious for buying the yellow metal, and beginning April 28, sales on this day are seen better than last year because of weddings and aggressive promotional campaigns offered by jewelers, reports Bloomberg.

Weaknesses

•The worst performing precious metal for the week was silver, down 4.08 percent.  Money managers cut their net long positions this week which were flirting with record highs achieved in 2016.  On Thursday, gold declined for the third time in four days, reports Bloomberg, as euro-area economic confidence jumps and Emmanuel Macron’s lead in French polls curbs political concerns.  “It’s all about the French election, which was a worry for many investors,” said Simona Gambarini of Capital Economics in London. “After the Dutch election and the Macron first-round win, it seems the risk of a repeat of Brexit elsewhere in Europe is much lower.”

•Following increased expenses at its mines in Argentina and Nevada, Barrick Gold Corp. tumbled after missing estimates and earnings on production. Shares fell the most in 21 months and as much as 11 percent in Toronto. This is only the company’s second earnings miss in seven consecutive quarters.

•The recent seismic event at Newcrest’s Cadia mine is greater than anticipated, according to David Haughton at CIBC. The underground operations are to remain shut down, possibly into fiscal year 2018. Full-year, fiscal year 2017 production is now expected at the lower end of 2.35M ounce to 2.60M ounce guidance, Haughton writes.

Opportunities

•In Paradigm Capital’s research note on the gold sector this week, the group writes that its analysis “highlights two daunting trends in the global discovery for major new deposits.” First, the rate of discovery has significantly declined from 1990-1999 relative to 2010-2015 and second, the cost of a new discovery has increased more than an order of magnitude, from $11/oz to $147/oz. Paradigm also writes, “majors can acquire advanced development-stage projects for a significant discount to what it would cost to explore and discover on their own ticket.” Although the pace of acquisitions has not picked up yet, the group believes it will, noting specifically that a new up-cycle appears to be slowly taking root. They see an opportunity for investors to take advantage of the “development discount” by adding a basket of quality development-stage and advanced exploration projects as a portion of gold portfolios.

•Global Mining Research looks at senior gold returns in its note this week, writing that there have been approximately $18 billion of gold transactions by seniors since 2012 at a ratio of 2:1, divestments to acquisitions. That has seen 3.8 million ounces per year of production divested. “Clearly the best assets haven’t been sold, so in theory the underlying businesses should be more profitable,” the note continues. From 2013 to 2016 the average margins for seniors was 35.2 percent, and over 2017E to 2020E, this is expected to improve to 43.5 percent. Lastly, the average ROIC for the group over 2013 to 2016 was 6.2 percent and this is expected to improve to 9.5 percent over 2017E to 2020E.

•Historically, Fed tightening cycles haven’t been sustained when both bond yields and crude oil are declining, writes Bloomberg Intelligence. And if these metrics don’t recover, the indication would be a one-and-done 2017 Fed. In a similar note, among the highest-correlated market indicators to the Fed funds rate is the shape of the gold one-year futures curve, which has stalled in 2017, reports Bloomberg. As you can see in the chart below, if the curve continues to flatten, the indication would be Fed one-and-done as mentioned above. “Since gold is a currency, its futures curve is priced off interest-rate expectations,” the article continues.

Threats

•Even with the unpredictability of President Donald Trump during his first 100 days in office, gold has yet to reclaim the surge it saw before his win in November, reports Bloomberg. In fact, some investors don’t think gold will go back up any time soon. “Without huge surprises from Trump, some investors are inclined to see more losses in gold as the U.S. economy stays strong, the Fed tightens, bond yields rise and inflation remains subdued,” the article reads. After Emmanuel Macron won the first round of the French election, Goldman predicts gold at $1,200 in the three months following.

•Because of President Trump’s tax plan and its disregard for the effect on the federal budget deficit, Bloomberg writes that this could pique the interest of a long-dormant segment of bond investors. “So-called bond vigilantes, once feared for enforcing restraint on spendthrift governments, have struggled to flex their muscles in recent years as global central banks stepped in to buy a glut of sovereign debt,” the article continues. With the Fed talking about trimming its Treasury holdings while the administration’s tax plan could spur more borrowing to cover a shortfall, now might be their time for a comeback! Those who think inflation is inevitable while the debt burden grows, tend to favor assets like gold.

•Gold buys the most silver since June, reports Bloomberg, as prices are set to cap their fourth monthly gain for the longest winning run since 2012. Silver has dropped more than 5 percent in April. According to Bloomberg, the move in the gold-silver ratio may signal a decline in gold. “I’d expect gold to play catch-up sooner rather than later,” said Jeffrey Halley of Oanda Corp. in Singapore (who also sees a break of $1,260 an ounce).

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