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In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,145.89 up $6.87 per ounce (0.60%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 3.13%. The U.S. Trade-Weighted Dollar Index gained 1.35% for the week. Junior miners outperformed seniors for the week as the GDM Index lost 3.13 percent, more than the S&P/TSX Venture Index’s loss of 1.53%.
Gold Market Strengths
Palladium was the best performing precious metal, rising 9.46 percent for the week. Volkswagen’s emissions scandal opens up the possibility that buyers may turn towards gasoline cars which use more palladium.
China’s net imports of gold from Hong Kong increased last month as the surprise devaluation of the yuan and inventory building before the peak consumption season spurred buying. Net purchases rose to 54.7 metric tons from 40.7 tons in July and 25.6 tons a year earlier. Gold purchases in India are poised to climb in the final quarter to the highest level since 2012, adding to signs that lower prices are spurring a resurgence of buying in Asia.
Gold traders are bullish for a second week on the view that the Fed is to remain dovish. Further, the put-to-call ratio, which represents the number of bearish options trading, compared with bullish ones, for SPDR Gold Shares is at the lowest since 2012. This is seen as a signal bears may be losing their stranglehold on the market.
Gold Market Weaknesses
Fed Chair Yellen dealt a blow to gold bulls who had pushed prices to the highest in a month. On Thursday after the market close, she said the Fed is on track to raise interest rates this year. Investors had boosted holdings in gold-backed funds to the highest in three weeks.
Platinum was the worst performing precious metal, falling 3.36 percent for the week on concern that there could be a substantial drop in platinum usage if consumers buy fewer diesel cars as a result of the Volkswagen scandal. Share prices of South Africa’s platinum miners fell 16 percent for the week on average.
President Jacob Zuma surprised everyone this week when he redeployed the existing minister of the Department of Mineral Resources, Ngoako Ramathodi, to the role of Minister in the Department of Public Services and Administration. In his place, Zuma appointed Mosebenzi Zwane. The appointment of Zwane comes as a surprise to the industry and organized labor based on his lack of experience in mining, especially when compared to the current deputy minister.
Gold Market Opportunities
Morgan Stanley, Bank of America, and Citigroup are among banks that have lowered their dollar forecasts against the euro during the past two weeks. The U.S. Dollar Index has gained 0.9 percent this quarter, compared with estimates for a 2.5 percent increase. UBS also came out with a report in which they cite excessive optimism on the dollar. Their conclusion is that we could be on the cusp of a weakening dollar trend.
Jeff Christian, founder of CPM Group, announced at the Denver Gold Show that he is bullish on gold, albeit not seeing a significant rise until perhaps 2018. CPM Group analysis sees global new mined gold output continuing to rise by small amounts until 2017. Subsequent to 2017, the dip in supply will allow fundamentals to kick in, pushing the price of gold substantially higher.
A new report by UBS highlights their constructive stance on gold, especially over the longer term. The report talks about relevant factors that investors should start to consider today, especially in light of the dovish Federal Open Market Committee (FOMC) outcome. One of those factors is the possibility that U.S. equilibrium real yields settle lower versus previous cycles and versus current market expectations. That could suggest a better environment for gold than what gold market participants are currently anticipating.
Gold Market Threats
According to a recent report “Unwinding the Great Liquidity Cycle” by Julien Garran from Macro Strategy Partnership, the decline in global foreign exchange reserves at central banks is today almost twice as aggressive as during the Great Recession. The implications are a reversing bid for U.S. treasuries and credit when the Fed does not want interest rates to rise aggressively should there be a policy mistake.
In that same report, Garran also takes a look at the global money supply and concludes that it doesn’t shrink often, but when it does, as we see today and in the prior global financial crises, it spells trouble for global risk assets. That raises the possibility that treasuries have been such a beneficiary of the great liquidity cycle that they have lost their ability to rally during a deflationary bust. After all the Fed has stopped buying, banks are being forced to reduce repo purchases with more regulation, and foreign central banks are net sellers. Garran recommends that investors be positioned short U.S. equity indices, long cash and long gold & gold equities.
A worrisome trend coming from presenters at this year’s Denver Gold Show is the slashing of exploration budgets, particularly by junior miners. This has implications for gold production sustainability given long discovery-to-production cycles, currently pegged at 27 years and growing due to an increasing regulatory-social-environmental gauntlet.
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