Is The Dollar Rally Nearing Its End?

Strengths

• Deutsche Bank said that after seven consecutive days of gains in the gold market, it has become increasingly difficult to dismiss the rally as merely a function of the recent weakness in the U.S. dollar. Additionally, Saudi Arabia-led bombings in Yemen this week boosted demand for safe-haven assets. The Saudi government pledged to continue the strikes against Shiite rebels to prop up the allied government.
• Bank of America believes the euro/dollar squeeze is not over, meaning the dollar should continue to correct lower. Given this outlook, BofA recommended buying any dips in the gold price and set a target of $1,307 per ounce.
• Shanghai Gold Exchange withdrawal volume through March 13 was 51.5 metric tons (mt). If this pace continues, withdrawals this year would exceed last year’s 2,102 mt.

Weaknesses

• JPMorgan Chase, Barclays, Goldman Sachs, HSBC, Bank of Nova Scotia, SocGen and UBS will be the participant banks in setting the LBMA Gold Price benchmark. Several of these banks have been involved in commodities price-fixing scandals. China, now a major player in the global gold trade, was not granted representation. Commentators have speculated that had Chinese banks been included, there would be less room for manipulation.
• Reports have been circulated speculating that Nevsun’s Bisha mine had been bombed by the Ethiopian Air Force, in retaliation to an Ethiopian helicopter being held by Eritrea, earlier in the week. So far Nevsun has only reported an “act of vandalism” at the mine which caused no significant damage, affecting only the base of a tailings thickener.
• Platinum non-commercial Nymex shorts have more than doubled since the beginning of February and last week rose another 13.2 percent to their fourth successive all-time high. Several factors have weighed on the metal recently including an ongoing weak demand outlook due to constrained diesel auto catalyst consumption in Europe, poor jewelry demand for platinum in China, and South African supply recovering much more quickly than expected after last year’s five-month-long strikes.

Opportunities

• HSBC analysts, some of the earliest adopters of a bullish view on the U.S. dollar back in 2013, now believe the dollar rally may be at or nearing its end. The analysts point out that past dollar rallies of this type have mostly seen a dollar appreciation of around 20 percent and lasted from under a year, meaning the current rally is already extended. Furthermore, they pointed out that disappointing U.S. economic data is mounting and being largely ignored. Valuations suggest that the U.S. dollar may now be the world’s most overvalued currency, only being overshadowed by the strength in the Swiss franc since its tie to the euro was cut.
• The Philadelphia Gold and Silver Index, made up of the largest gold stocks, is at around a 73 percent discount to the bullion price, with the index more than 60 percent lower than the start of 2008. Gold, on the other hand, is still more than 40 percent higher. The index’s total price/cash flow has almost halved from 2008, to around 7.5x from 14.3x even though it is expected to post its first positive operating income this year since 2012.
• TD Securities published a precious metals outlook in which the firm questions the sustainability of the supply/demand balance in the gold market due to declining reserves. 2014 marked the third straight year of reserve declines, with exploration spending being reduced as miners focused on capital preservation. Total reserves for the large-cap producers are down around 24 percent from the 2011 peak. The decline highlights that existing exploration budgets are not sufficient to keep pace with current mining depletion. In contrast, Integra Gold announced it recently intersected 14.8 grams per tonne (g/t) gold over 10 meters and 11.5 g/t gold over 8 meters in a step-out drilling up to 330 meters from triangle.  Discoveries like Integra could make it of interest as a takeover target.

Threats

• Analysts at SocGen published a report in which they forecast that the gold price, having given away all its early year gains, is headed sharply lower, as they see a continuation in the dollar’s strength. They see the price of gold falling to an average of $925 per ounce between 2016 and 2019. The timing of the report was perhaps unfortunate in that it predated the events of the past few days, which has seen the reverse, occur.
• CPM Group sees gold falling for a third straight year in 2015 as concern eases that global economies will falter, curbing demand for the metal as a haven. CPM Group forecast gold will average $1,208 per ounce in 2015.

• Under the auspices of fighting terrorism, France’s Minister of Finance has rolled out a series of eight new restrictions aimed specifically at minimizing the use of cash. In reality, these are capital controls designed to keep individuals’ savings trapped in the banking system. Many banks in Europe have already dropped their deposit rates into negative territory and as interest rates become even more negative, more people will realize that they’re better off holding physical cash instead of paying their banker to hold it for them.

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