Gold Equities Have Room To Run

Strengths

• The best performing metal this week was palladium, up 1.88 percent, despite hedge funds cutting their net bullish positions to a 10-week low. Gold bulls outnumbered the bears in the weekly Bloomberg survey of traders and analysts for a second week as the metal notches a third weekly gain. Bullish respondents say the turmoil in global equity and bond markets is strengthening the investment case for gold. Silver is also rallying alongside gold on recession fears. The core consumer price index (CPI) rose 0.3 percent in July from the prior month, which is historically positive for the yellow metal.
• A growing number of data points support another rate cut from the Federal Reserve next month as insurance against a global slowdown, writes Bloomberg’s Steve Matthews. Deutche Bank analyst Benjamin Fisher says that positioning is not stretched in gold equities, which means that there is alpha opportunity.
• As the U.S.-China trade war moves into a currency war as well, demand for gold is skyrocketing as a perceived safe haven asset. Whitney George, president of Sprott Inc., says “gold is a currency, but it’s nobody’s obligation, so it will stand tallest when everyone else is trying to debase their currency to be competitive globally.”

Weaknesses

• The worst performing metal this week was platinum, down 1.31 percent. Friday marked the seven-year mark since the Marikana Massacre when 34 miners were shot dead by police during a protest at Lonmin’s Markikana platinum mine. Retailers jumped, and gold plunged, after the Trump administration announced a delay until mid-December for the 10 percent tariff on some Chinese goods. Demand for gold as a safe haven was dampened on the news, but then recovered later in the week. According to data compiled by Bloomberg, the SPDR Gold Shares ETF saw almost $523 million of outflows on Tuesday after the news, the biggest one-day decrease since 2016.
• Morgan Stanley says that gold stocks have run harder than warranted and are overbought as investors flock to safe haven assets. Barrick Gold is looking for buyers for Australia’s Kalgoorlie superpit mine that was once the country’s largest and says that Northern Star has potential interest. Northern Star’s share price tumbled 8 percent on the news. This raises doubts about the potential purchaser of the mine that was once seen as a massive opportunity.
• Anglo American Platinum Ltd, the world’s top platinum and palladium supplier, is looking to invent a new battery to counter the long-term threat of the electric car boom. Bloomberg writes that EV demand is a threat to demand for automobile catalysts, which use the two precious metals to clean toxic emissions. However, these two metals are heavier and more expensive than what is currently used in EV batteries.

Opportunities

• Gold equities are cheap and have room to continue running relative to the gold price, as they are lagging their historical relationship. The chart below compares the price of the senior gold miners to the price of gold 10-years ago.  The miners have taken a much bigger drop than the gold price.  TD Securities writes in a note that it expects a further rotation from producers down to the junior miners and eventually to the emerging producers to developers, which will be catalyzed by high profile M&A activity. Jeff Currie, global head of commodities research at Goldman Sachs, says that central banks are buying gold because they don’t want to own dollars with sanction, geopolitical and trade-war risks. UBS raised its gold price forecast in 2020 to $1,550 per ounce as their economists believe a U.S.-China deal is looking increasingly unlikely, reports Bloomberg.

• Former Federal Reserve Chairman Alan Greenspan said this week that he wouldn’t be surprised if U.S. bond yields turn negative and that if they do, it won’t be that big of a deal. Greenspan said in a Bloomberg interview that “there is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, besides being a certain level.” This comes as 10-year TIPS were negative for two days this week. Negative yields have historically been positive for the price of gold.
• South Africa’s Public Investment Corp., the continent’s largest money manager, sees big investment opportunities in West Africa to drive the next gold mining boom. Mining research analyst Lebohang Sekhokoane says “when you look at the gold sector in West Africa, that’s where the sun is rising.” The firm highlights Ghana, where AngloGold Ashanti and Gold Fields are shifting more production to and away from South Africa. Cardinal Resources also has its 5.1 million ounce shovel-ready reserve in Ghana and could be a takeover target.

Threats

• An 18 percent surge in bullion over three months is great news for mining companies, writes Bloomberg, but has spurred a burst of illegal prospecting that has helped fuel organized crime within some of the world’s top gold-producing regions. This is bad news for natives in these mining areas, leading to suffering caused by threats, danger and even mercury poising. In fact, a third of the gold imported from Latin America in 2013 was mined illegally – meaning proper permits were not obtained, areas were not environmentally protected or heavy machinery was used without oversight.
• According to Morgan Stanley analysts, a supply gap for palladium, rhodium and platinum is seen persisting over the next four years, reports Bloomberg, as tighter vehicle emissions standards drive demand. Tighter emissions for heavy-duty vehicles could boost platinum use in China and India in particular, the article continues.

According to industry sources, China has severely restricted imports of gold since May, reports Reuters, in a move that could be aimed at curbing outflows of dollars and bolstering its yuan currency as economic growth slows. Shipments have been cut by around 300-500 tonnes compared with last year – worth $15-25 billion at current prices, the article continues. China is the world’s biggest gold importer, accumulating what is equivalent to one-third of the world’s total supply.

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