Gold Mining Shares Rally While Gold Price Remains Muted

Strengths

• Gold traders remained bullish for a third week on speculation that a weaker dollar will increase demand.  Supportive of this survey, Shanghai Gold Exchange withdrawals were 857.7 metric tons as of May 8. Gold imports by India exceeded 100 metric tons for a second month in April as easing of state curbs on bullion imports boosted demand. German investors increased their buying of gold coins and bars by 20 percent during the first quarter, the highest rate in a year, as a hedge against European Central Bank (ECB) policy and the threat of a Greek default. Lastly, by weight, April saw the strongest net demand for gold according to BullionVault since August 2013.

• Shares in gold mining companies are rallying this year while bullion prices have remained muted. Stock prices often anticipate moves in of the underlying drivers, so this could point to a turn in the gold market.
• Silver is no longer the poor man’s gold as solar demand surges. Demand for solar power is set to increase by 30 percent in 2015.  After years of growth, silver production is expected to flatten as new investment in commodities has been put on hold.

Weaknesses

• Gold ETF holdings declined as investors sold the most from bullion-backed funds in seven months, according to Bloomberg.
• Trading volumes in the global spot gold market have fallen to the lowest in a year, with shrinking liquidity and a slowdown in interbank trade, making customers reluctant to transact on a large scale.  Tighter regulatory oversight post the accusations of price manipulation have curtailed interbank activity.
• Rallying Chinese stocks and a six-year U.S. bull market cut the appetite for gold in the first quarter according to the World Gold Council. Global demand for jewelry, coins and bars fell 5 percent in the first quarter from a year earlier as shoppers in the Middle East, China and the U.S. reigned in purchases.

Opportunities

• Peng Xingyun, researcher at the Chinese Academy of Social Sciences, published an article in the China Securities Journal saying that with U.S. interest rates expected to increase, China should increase gold reserves and reduce holdings of U.S. treasuries to further boost confidence in the yuan. On a related note, China also has ambitions to include gold market development in the “One Belt One Road” economic project, according to the Managing Director of the World Gold Council.
• Bridgewater’s Ray Dalio announced that everyone should allocate some of their portfolio to gold, saying that those who don’t “either don’t know history or don’t know the economics of it.” Also, in a recent roundup on the outlook for gold, ScotiaMocatta said a strong upside surprise may be in store for the price of gold. According to the group, the most bullish aspect of the gold market is that other assets are already expensive and thus, when things correct, people will look for a cheap safe haven.
• Reuters reported that Mexico’s government is drawing up a land reform package to present to Congress in September that would strengthen the rights of private companies dealing with rural landholders in a bid to lure investment.  In recent years, rural landowners have increasingly pressed to re-negotiate past agreements.

Threats

• South Africa’s biggest gold-mining labor union demanded a pay package of more than 80 percent for entry-level underground workers. The union’s wage request far outstrips the country’s annual rate of inflation. Negotiations are set to start in June. Along these issues, AngloGold Ashanti’s CEO said that South Africa’s competitive position is deteriorating rapidly. He said that there cannot be a debate on wage increases without economic consequences and pointed out that South Africa used to be the number-one gold producer in the world and is now ranked eighth.
• The South African Department of Mineral Resources has announced that only 20 percent of mineral right holders are compliant to the Mining Charter’s ownership requirements. In contrast, the Chamber of Mines has responded with a statement that its members representing 85 percent of the industry have met and exceeded these targets. HSBC believes these disagreements signal deterioration in the trust relationship between government and industry which bodes negatively for broader investor sentiment.
• According to GFMS analysts at Thomson Reuters, platinum prices could test $1,000 per ounce this year as supply from South African mines and global auto catalyst recyclers climbs by 22 percent and 10 percent, respectively.

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