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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 $1,175.48, up $18.20 per ounce (1.57%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, gained 1.72%. The U.S. Trade-Weighted Dollar Index fell 0.08% for the week. Junior miners underperformed the seniors for the week as the S&P/TSX Venture Index gained just 0.73 percent.
Gold Market Strengths
Platinum was again the best performing precious metal, rising 3.31 percent for the week. Platinum historically has traded at a premium to gold, so perhaps there is still further room to go.
Gold is beginning to shed its reputation as a dead asset thanks to the string of lukewarm economic reports in recent weeks. As a result, there is speculation that the Federal Reserve probably missed its window to hike in 2015. Gold has now managed to rise above the technically important 200-day moving average for the first time in five months. Furthermore, the world’s largest gold ETF recorded its highest daily inflow since early February with an addition of 7.7 tonnes. The gold price, which typically trades inverse to the U.S. dollar, may have some real room to run as the recent dollar weakness has put in a “death cross,” with its 50-day moving average price plunging beneath its 200-day average price.
Australia and New Zealand Banking Group said it expects gold to reach the bottom of the recent range in the next couple of months. It said its physical demand barometer for China rose to a 2-year high in September, suggesting demand before Golden Week is very strong. The group expects sharp increases in China’s gold imports in September. Lastly, its forecast for the fourth quarter is $1,110 per ounce.
Gold Market Weaknesses
Japan’s second-biggest trading house with involvement in the precious metals dating back to the 1970s, Mitsui and Co., said it will pull out of overseas precious metals trading after evaluating the profitability of the business. The company will keep its business in Japan. According to the company, this decision had nothing to do with the naming of the company by Swiss authorities as one of six involved in the manipulation of gold price fixing in London.
Palladium was the worst-performing precious metal, falling 2.06 percent on the unwinding of speculative trades that had shorted platinum to go long palladium. Silver only gained 1.41 percent this past week, slightly underperforming gold.
Third-quarter revenues for the S&P 500 Index are projected to fall 3.3 percent from the third quarter of last year, following a 3.3 percent decline in the second quarter and a 2.8 percent drop in the first quarter, according to FactSet. Fourth-quarter revenues are projected to decline 1.6 percent. The last time revenues ran four negative quarters in a row was during the 2008-2009 Great Recession.
Gold Market Opportunities
According to DBS Group Holdings, the Fed will raise U.S. rates only gradually, and the cycle will peak at a lower level than earlier rounds. They interpret this change to allow gold some room to run when the market comes to realize the new paradigm.
According to Elliott Management’s Paul Singer, gold is under-owned and should be part of every investment portfolio to the tune of 5 to 10 percent. At the SOHN Investment Conference in Tel Aviv, Singer criticized monetary policymakers, calling them the “cult of central banking” in which investors turn to regulators such as Janet Yellen to solve the ills of the global financial system. He also said the supply of gold cannot be radically expanded in a short period of time, which paints a good demand/supply imbalance. Furthermore, bullion looks extended as it has posted five consecutive quarterly losses, the longest run of declines since 1997.
Haywood Securities has initiated coverage on Fortuna Silver Mines with an outperform rating and a $4.50 target price. They highlight the company’s stable operating platform with fully-funded organic growth potential, industry leading margins that are set to improve as expansion plans unfold, balance sheet strength and a valuation that provides a compelling entry point.
Gold Market Threats
Natixis sees gold prices averaging $990 an ounce in 2016 on expectations of higher U.S. interest rates and strength in the U.S. dollar.
According to Cornerstone Macro, there is no consensus on what to do inside the Federal Open Market Committee. While Chair Yellen has touted the Phillips curve on various occasions, both Daniel Tarullo and Lael Brainard have dismissed it, sending mixed signals. This internal disconnect in a coherent message could cause market participants to lose faith in the Fed. Such a loss of confidence would disrupt market prices.
According to a report by Goldman Sachs, BHP Billiton’s and Rio Tinto’s net asset bases are three times higher than they were a decade ago, yet they are not as productive. Much of the capex invested in the super-cycle was subject to major inflationary pressures. Thus, the bank contends that book values are overstated relative to production levels.
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