A Closer Look At Gold Flows

Strengths

·         The best performing precious metal for the week was silver with a surge of 4.18 percent following the poor jobs report.

·         As seen in the chart below, when comparing the S&P 500 Index and Newmont Mining, the only gold mining stock in that index, on free cash flow per share growth, Newmont has performed significantly better. Both quarter-over-quarter and year-over-year, the mining company beats the broader index on this factor.

·         The August unemployment report came in soft on Friday, with payroll expansion of 151,000, reports Bank of America. Consumer confidence surprised to the upside, while the ISM manufacturing index slipped to 49.4. In addition, the Department of Labor reported that second quarter productivity fell by 0.6 percent (the longest streak of declines in more than 35 years). As BofAML notes, when faced with a choice of defending the inflation target or allowing a modest overshoot, the Fed will choose the latter, meaning negative real rates could persist ahead.

·         The government in Burkino Faso wants to help mining companies that are already in operation in the nation to lengthen the lives of their mines, reports Bloomberg, and make it easier for new investors to get information about deposits. The supportive policies for wealth creation in the nation are strong. Not only are troops being deployed to secure the mines, but the government is also building seven solar power plants to help deal with an electricity shortage.

Weaknesses

·         The worst performing precious metal for the week was palladium with a loss of 1.85 percent.  Russia’s state minerals depository noted they do not have any orders to buy platinum or palladium for inventories this year.

·         Gold is in its longest run of declines since May, reports Bloomberg, following speculation from leading central bankers that U.S. interest rates could rise as soon as September, lifting the dollar. “Gold’s rally this year has been pegged back as a rate hike is/was now on the cards,” the article continues. Metal for immediate delivery fell 2.2 percent this month and the momentum of bullion purchases for ETFs slowed.

·         During the three months through June, central banks cut their purchases by 40 percent compared to the same time last year, according to data compiled from the World Gold Council. This was the third-straight quarterly drop, reports Bloomberg, making it the longest streak in at least five years. In a similar mood toward the yellow metal, Citi analysts cut their six month stance to bearish, reversing their upgrade of the sector following the Brexit vote.

Opportunities

·         In RBC Capital Market’s The Morning Miner report, the group’s traders were noting that the last rate raise by the Fed was in December of 2015, and since then the GDX is up over 100 percent. When looking at spending for the miners, the report shows that a majority of companies have “sustaining capex below 50 percent of full-year guidance.” A Morgan Stanley report also highlighted capex intentions out of Australian companies, noting that fiscal year 2017 capex intentions provide better visibility on an expected -32 percent plunge in resource spend.

·         TD Securities released its Precious Metals Second Quarter Recap report this week, noting that overall the quarter was largely in-line with expectations. The group says margins were up slightly as the increase in gold price more than offset modest cost increases. In addition, production was relatively flat quarter-over-quarter, but remains down year-over-year. Lastly, positive free cash flow generation continued during the second quarter, with companies maintaining a tight lid on non-essential spending.

·         Despite gold and silver stocks being up over 100 percent in 2016, Sean Williams at Motley Fool says they can still be considered “value stocks,” particularly relative to the S&P 500. His analysis is based on price-to-cash flow per share ratio (P/CFPS). Currently, the S&P 500 is valued at 8.7 times P/CFPS (and generally speaking it is often between 10 and 20). “However, if you look at gold and silver stocks, you’ll find substantially cheaper alternatives on a price-to-cash flow per share basis,” Williams continues. “Especially after this last correction. In many instances, you can find mid-to-high, single-digit P/CFPS among gold and silver miners.”

Threats

·         Some of South Africa’s biggest mining companies are opposed to a government proposal that 1 percent of their annual revenue be spent on developing communities associated with their operations, reports Bloomberg. Some have countered with suggestions that they pay a share of profit instead. These companies already pay royalties to the government, differing by commodity. For example, gold producers pay around 3 percent of revenue, says Bloomberg.

·         James Rickards recently pointed out the risks of having all of your assets in a digital format versus owning some physical gold.  Rickards notes whether that means digital currency deposits, digital gold, digital stocks, etc. According to the Zero Hedge article, Rickards believes these assets are now intermediated by technology which creates counter party risk from the platform, liquidity providers, etc.

·         Christopher Louney from RBC Capital Markets writes that the Chinese gold market will continue to grow, according to the group’s analysis on the space. However, he notes that lower net demand and continued supply growth means that the demand shortfall should narrow this year, thus “feeding the dragon” should be easier this year than in those past. The group also reiterates their belief that the gold price will weaken, noting the “investor-only” nature of this year’s gold rally while jewelry sales have stagnated.

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