Gold Rose To Highest As Treasury Yields And The Dollar Slumped Amid Inflation Concerns

Strengths

• The best performing precious metal for the week was platinum, up 2.92%, largely moving with the Thursday surge in precious metals. Palladium surged to the highest level in a month as industrial users took advantage of low prices even as the ongoing semiconductor crunch dampens the outlook for auto demand.
• Royal Gold streaming sales were 64,000 gold equivalent ounces, 8% higher than consensus. Outperformance versus consensus was attributable due to higher silver sales, where the company previously reported deferred ounces from Pueblo Viejo which would increase following recovery improvements at the operation.
• Gold rose to the highest in nearly a month as Treasury yields and the dollar slumped amid concerns rising prices may hinder a nascent economic recovery. The yield on the 10-year Treasury note fell after an initial increase following a U.S. inflation report that showed a faster-than-expected rise in consumer prices last month. The greenback dipped to a session low. Both movements are helping boost demand for non-interest-bearing bullion. However, profit taking on Friday trimmed the weekly gain.

Weaknesses  

• The worst performing precious metal for the week was palladium, off 0.12% by the end of the week as Friday’s price action wipe away the potential weekly gain. Dundee Precious Metals reported preliminary production results for the third quarter, with consolidated gold output of 71,700 ounces, (missing the consensus of 77,800 ounces). Chelopech had sequentially lower production at 38,400 ounces because of lower grades.
• Top palladium producer MMC Norilsk Nickel PJSC further cut its outlook for the metal’s shortages as a semiconductor supply crunch weighs on demand in the key auto sector. Norilsk Nickel now sees palladium’s shortage totaling 200,000 to 300,000 ounces this year, down from a previous estimate of 400,000 to 500,000 ounces. For next year, the deficit may be 300,000 ounces, compared with the last outlook for a 700,000-ounce deficit.
• Exchange-traded funds (ETFs) cut 86,759 troy ounces of gold from their holdings in the last trading session, bringing this year's net sales to 8.3 million ounces, according to data compiled by Bloomberg. This was the eighth straight day of declines, the longest losing streak since August 26. Total gold held by ETFs fell 7.8% this year to 98.8 million ounces, the lowest level since May 15 of 2020

Opportunities

• Newcrest announced that the Newcrest Board has endorsed the Red Chris Block Cave Pre-Feasibility Study and approved its progression to the Feasibility Stage. The study confirms Newcrest's original investment thesis of unlocking the underground portion of this Tier 1 deposit by leveraging Newcrest's industry-leading block-caving expertise and developing the asset to become a mainstay of Newcrest's portfolio. The study is the first technical report issued by Newcrest on Red Chris since its acquisition of a 70% interest and operatorship in August 2019. The project is expected to average annual production of 316,000 ounces gold and 80,000 tons per year copper production from Macro Block 1 in the fiscal year 2029 to 2034. Capital cost to develop the project is estimated at $2.1 billion USD. Based on this production and cost profile, the company estimates a 17% internal rate of return (IRR) and $2.3 billion USD net present value (NPV) over a 31-year mine life. Longer mine lives versus short-term mines are becoming more desirable.  Juniors controlling such assets are likely to attract the interest of majors.
• This morning Superior Gold released third quarter production that beat consensus estimates (19,400 ounces Au actual versus the consensus of 17,000 ounces Au). This sets up the company well for the upper half of 2021 production guidance. Open pit mining is progressing on schedule, with grades materially increasing sequentially. This should help the company reliably increase production. 
• Aya Gold & Silver cited production of 338,624 ounces of silver in the third quarter, a 198% increase compared to 113,655 ounces silver in the third quarter of 2020. Aya Gold & Silver also increased 2021 production guidance to 1.55 million ounces silver, a 29% increase over initial guidance of 1.20 million ounces silver.

Threats

• According to Raymond James, they expect margin compression in the third quarter, as average gold, silver, and copper prices declined sequentially while inflationary pressures negatively impact operating costs. They expect the margin compression to be partially offset by improving production levels sequentially, particularly for the gold producers.
• Barrick Gold production of 1.09 million ounces was 3% below consensus. Weaker results reflect prior disclosed challenges at the Nevada operations (e.g., Carlin roaster repairs) and at Hemlo (e.g., COVID-19 concerns). The latest production report suggests third quarter earnings-per-share (EPS) could come in at $0.24/share, below the consensus of $0.31/share. National Bank Financial expressed concern that the share price could remain under pressure until operational performance is stabilized, which the market will want a couple quarters of proof before the shares could rerate.
• According to Goldman Sachs, palladium and platinum have corrected materially from their year-to-date highs due to the severe disruption in global auto production due to chip shortages. They now expect both metals to be in surplus in 2021-22. Beyond that, they think both markets are on their way to a structural rebalancing as the price differential leads to thrifting and the substitution of palladium and a greater use of platinum. In their base case of broadly balanced markets beyond 2022, they expect a large palladium premium over platinum to persist due to divergence in above-ground stock levels and the need to continue to incentivize substitution.

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