Gold’s Strength Is Justified Says UBS

Strengths

• The best performing precious metal for the week was palladium, up 5.10 percent.  Grant Sporre, an analyst at Deutsche Bank, noted there is a genuine physical tightness in the market, but the spike had all the hallmarks of someone being caught short and being squeezed.  Bullionvault’s Gold Investor Index, which measures the balance of client buyers against sellers, rose the most in two years reaching a high of 55.3 in May versus 52.1 in April, reports Bloomberg. In India, gold imports jumped fourfold in May to 126 metric tons from 31.5 metric tons in the same month last year. In a report by the World Gold Council, consumption in India could climb dramatically this year as a “simple” nationwide Goods  Services Tax will boost the economy, making the gold industry more transparent to benefit buyers, reports Bloomberg.
• Amid unease over a congressional hearing on possible links between Russia and the Trump campaign, holdings in SPDR Gold Shares (the world’s largest gold-backed ETF) climbed to the highest this year on the back of safe-haven demand, reports Bloomberg. In the two weeks through the end of May, hedge funds and other large speculators boosted their bullish bets on the precious metal by 37 percent, notes another Bloomberg article, the most since 2007 according to government data.
• Japanese investors sold a record amount of U.S. debt in April, reports Bloomberg. “Political turmoil in Washington and uncertainty about French elections pushed down Treasury yields, diminishing their attractiveness,” the article continues. Japanese investors cut holdings of U.S. debt by $33.2 billion in April, the most in data going back to 2005, according to a Ministry of Finance balance-of-payments report.

Weaknesses

• The worst performing precious metal for the week was silver, off 1.90 percent and largely in sync with the fall in gold.  Data from the People’s Bank of China show that the Asian nation kept its gold reserves unchanged for the fifth straight month. Holdings stand at 59.24 million ounces for the end of May, the same level since the end of October. UBS commented on the moves in a report this week. “We maintain our base case that purchases should resume up ahead as overall official reserves stabilize, given that the diversification argument remains intact,” writes Joni Teves at UBS. “Nevertheless, we acknowledge growing risks to this view considering that the pause in buying has gone on longer than we initially expected.”
• According to an emailed statement from the Athens-based Energy Ministry, the Greek government will seek arbitration against Hellas Gold to “ensure contractual obligations of the company,” reports Bloomberg. The compliance measures are in reference to Kassandra mines in northern Greece. On the flip side of things, Eldorado Gold says is hasn’t been notified of the Greek arbitration, and says it operates in accordance with all applicable laws and regulations in jurisdictions where it conducts business.
• Employees at Freeport McMoRan’s Grasberg mine in Indonesia who stopped showing up for work in mid-April (totaling 4,000 employees and contractors), are in the process of being replaced, reports Bloomberg. Freeport CFO Kathleen Quirk said in a presentation in Chicago that all 4,000 are deemed to have resigned. The company’s top priority for the remainder of 2017 is getting a long-term extension to operating rights in Indonesia.

Opportunities

• A rush to haven assets has led to two firms saying they plan to open vaults in Europe capable of holding more than 100 million euros in gold, reports Bloomberg. This would offer customers lower costs that ETPs as well as protection from rising prices. “Inflation is a key concern for many of our clients,” said Ross Norman, CEO of Sharps Pixley. In a related note, China (the world’s biggest gold market) could boost its imports through Hong Kong  by about half this year, as investors seek to protect their wealth from currency risks, reports Bloomberg. In fact, China’s gold imports are already heading higher in 2017. A slowing property market and volatile stocks also add to the safe-haven allure, according to the Chinese Gold & Silver Exchange Society.

• In its Global Precious Metals Comment this week, UBS writes that gold’s strength is justified by macro forces. “In particular, lower rates, weaker dollar and broader uncertainty provide good foundation for the market to continue its journey higher,” the report reads. The group adds that gold’s use as a portfolio diversifier has become increasingly relevant in the current environment and that despite the rally from May lows, UBS believes gold positioning is not crowded overall and there should still be room for the move to extend.
• Sean Casey, contributing analyst with Bloomberg, writes “Commodities’ negative correlation to the dollar has never been more stressed in the Bloomberg Dollar Spot Index’s 13-year history.” The note continues by stating that commodities could rally 20 percent just by catching up to the declining dollar. Over the past 26 weeks the dollar is down 6.1 percent and the Bloomberg Commodity Index is down 2.2 percent. “This unusual disparity has never happened since the dollar index’s start in 2004,” the article continues. “In the 73 weeks where the dollar ended down 5 percent or more on a 26-week basis, commodities have increased 20 percent on average.”

Threats

• Mexico’s tax agency owes Canadian mining companies over $360 million in tax rebates, reports Reuters and Bloomberg. The sum includes $230 million owed to Goldcorp and $66.5 million to Torex Gold Resources, just to name a few. “It’s damaging the ability to reinvest the dollars in assets that actually pay real tax,” said Torex chief executive Fred Stanford. The situation proves even more difficult for smaller, cash-strapped miners and explorers.
• A note from Global Mining Research this week states that wholesale electricity prices have nearly tripled over the last 18 months in Australia, primarily driven by capacity closures and higher gas costs, according to Energy Australia. Although short-term fluctuations are nothing new, “these price increases look here to stay with new generation capacity needed.” The mining industry in South Africa is also facing cost pressure. Its new mining charter will be gazetted and become law next week, Mineral Resource Minister Mosebenzi  Zwane said Tuesday. The mining industry doesn’t think it has been consulted enough on these changes and is thus losing investment. Similarly, Tanzania plans to introduce a 1 percent clearing fee on the value of mineral exports in 2017/18, according to its finance minister, part of government measures aimed at getting a bigger share of revenues from tis natural resources.
• Mitsubishi Materials Corp. processed 20 percent of all electronic waste gathered globally last year to recover gold, silver and copper, reports Bloomberg. The “urban miner” plans to expand processing capacity by 14 percent to 160,000 tons next year, according to senior managing executive officer Yasunobu Suzuki. The company plans to open a facility in the Netherlands in November to collect waste in Europe for processing at its Japanese facilities and should be additive to recycled gold supply.

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Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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