Frank Holmes provides a look into the gold sector via a SWOT analysis on an almost monthly basis. Below is his latest.
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Strengths
- The best-performing precious metal for the week was platinum, up 4.80 percent. The World Platinum Investment Council forecasts that platinum is to remain in deficit through the next six years.
- Bullion for immediate delivery rallied 5 percent in January, according to Bloomberg, the best gain in a year as seen in the chart below. Following the $15 trillion rout in global equity markets since May, the precious metals’ lure has reawakened. Bloomberg also points out that investors bought gold through exchange-traded funds for the past seven days straight, the longest stretch in a year.
- According to Bloomberg News, China’s imports of gold from Hong Kong jumped 67 percent in December to the highest level in more than two years on the back of market turmoil and anticipation of further weakening in the nation’s currency. In addition, Barclays forecasts that the People’s Bank of China (PBOC) will buy 215 tonnes of the precious metal this year, as the country “seeks to diversify its reserves.”
Weaknesses
- The worst-performing precious metal for the week was palladium, still up 0.37 percent. Total ETF holdings for both platinum and palladium declined this past week, but nearly twice as many ounces of palladium were liquidated compared to platinum.
- Eldorado Gold plans to write down the value of its assets up to $1.6 billion, reports the Canadian press this week, with a majority of concerns related directly to its mining operations in Greece. Aureus Mining has also run into some trouble with its plans for the New Liberty mine in Liberia. The company has deferred declaring commercial production following last-minute plant problems.
- The top forecaster from OCBC, Barnabas Gan, says gold is “shiny today,” but will be “dull tomorrow,” according to a Bloomberg article. Gan sees the precious metal at $950 by the end of 2016. In a similar statement, Richard Jerram with the Bank of Singapore thinks gold’s stellar start to the year won’t last as the U.S. jacks up interest rates.
Opportunities
- In the final quarter of 2015, total gold supply dropped 7 percent, according to data from Thomson Reuters, due to an estimated 4 percent drop in global mine output. Based on prior long-term price declines for the gold, Bloomberg reports that gold production may drop more than 20 percent in the next five to 10 years.
- RBC Capital Markets released its Global Gold Outlook this week. In the report, the group cites five themes that are new or look positive for the gold price: 1) Gold has been resilient in the face of a strong U.S. dollar, 2) The gold price has been in a corrective phase since late 2011, 3) A bimodal global economy is benefitting non-U.S. dollar holders of gold, 4) Central banks are now net buyers, and 5) Gold ETF positions have grown.
- Orex Minerals announced that its assay results for the first hole of the 2015-2016 diamond-drilling program on the Sandra Escobar Project hit 61 meters from surface-grading 359 grams per tonne of silver. According to the company’s president, Gary Cope: “This is an excellent high-grade and thick drilling result… and although it is early in the program, silver has been detected in outcrops over a strike length of 700 meters.”
Threats
- According to Freeport-McMoRan, one of the world’s biggest gold miners, it continues to operate after its export permit expired without receiving renewal. The Indonesian government has asked for a $530 million deposit on a new smelter in return for renewing the permit. A similar gloomy outlook was announced last Friday by Moody’s – the group put 55 mining and metals companies on review for downgrades to their credit ratings, citing “slowing growth in China.”
- This year investors are paying almost twice the average premium to own the most-recently auctioned 10-year notes, according to data compiled by Barclays. Bloomberg reports that part of the cracks in the bond market can be explained by turmoil in the financial markets, which have boosted demand for haven assets. The article goes on, however, to state “beyond those issues lie deeper concerns about the very structure of the U.S. bond market, and whether post-crisis rules intended to present another financial catastrophe have ultimately left it broken.” It seems the cure killed the patient!
- Gary Cohn, president of Goldman Sachs Group, says that Treasury yields will likely rise, according to Bloomberg, while Morgan Stanley is predicting just the opposite. Treasuries are heading toward their biggest monthly gain in a year, earnings 1.5 percent in January. Tumbling oil and equity prices are driving investors to the “relative safety of government debt”—and gold.