Gold Stocks Looks Disproportionately Cheap Relative To Gold

Strengths

• Palladium was the best performing precious metal this week, up 4.45 percent. Trade data shows that China’s palladium imports surged 33 percent sequentially in September as the metal’s price plunged 30 percent from a year ago. In addition, there is an obvious strong correlation between a low gold price and the number of Chinese consumers searching online for “gold jewelry,” as seen in the chart below. According to the World Gold Council, this relationship ultimately paints a picture of a Chinese consumer who is acutely aware of changes in the gold price.

• Canadian mining company Lucara Diamond Corp. recovered a massive, 1,111-carat diamond this week from its Karowe mine in Botswana. The diamond is thought to be the second-largest, gem-quality stone ever found, after the infamous Cullinan diamond recovered in 1905 in South Africa. The diamond is sure to sell for a massive price at auction, which will be positive for Lucara.

• Gluskin Sheff reports that wage inflation is back, after the recent U.S. payroll report indicates that the wage inflation rate is 2.5 percent year-over-year. Historically inflation is good for gold, as gold is typically seen as a hedge against inflation.

Weaknesses

• Platinum did not follow palladium prices higher this week but instead was the worst performing precious metal, down 0.99 percent. HSBC suggested physical demand may have been stronger for palladium. Not far behind were gold and silver, down 0.56 percent and 0.51 percent, respectively.
• In a corporate update from Atico Mining, the company announced that Colombian subsidiary Minera El Roble has received notice of a claim from the mining authority in Colombia. The claim requests payment of royalties related to past copper production and is based on the current mining law. The current mining law in Colombia explicitly states that it does not affect contracts executed prior to this law entering into force. Atico Mining has taken the position that the authority’s claim is not legitimate.
• Silver has been on a 15-day losing run this week, according to Bloomberg. Following the Federal Reserve minutes on Thursday, however, the precious metal added 0.2 percent to $14.21 an ounce. Perhaps this will snap the metal out of its longest losing streak on record, based on data starting in 1950.

Opportunities

• Banks that handle commodities could be required by the Fed to increase their capital cushions as a hedge against accidents, reports the Financial Times. “Accidents” would include things like tanker spills or gas pipeline explosions. Fed Governor Daniel Tarullo stated last November that the U.S. central bank was considering such rules in order to increase capital and insurance requirements, limit the size of operations, or prohibit firms from holding certain commodities.  Hopefully with banks being required to hold more capital they will be less likely to engage in what has been argued as price manipulation in the metals market.
• Now might be the time to buy gold, according to Ken Goldberg of TheStreet. Gold, along with silver, copper, platinum and palladium are in what appears to be the final stages of corrective declines, meaning they may be due for technical relief. The chart below from Scotiabank highlights that after a set of third-quarter reports showing the significant cost improvements at the operational level, the market may want to take this improvement in the fundamentals to rotate from gold to gold stocks (or into the sector as a whole). Investors could benefit from this extremely oversold position in the stocks relative to the commodity.

• South African miner Gold Fields climbed the most in 16 years as improvements to its South Deep mine lowered costs, according to Bloomberg. In a statement on Thursday the company said that cash outflows at South Deep, which were affected by delays, fell 26 percent to $20 million in the third quarter. The mine’s production climbed 42 percent.

Threats

• During the course of 2015 gold has lost around 9 percent, dropping to a five-year low and losing some of its appeal as the Fed prepares to hike interest rates for the first time since 2006. Last month Goldman Sachs reiterated that a rate hike in December would likely hurt bullion, and forecasted the precious metal at $1,050 in six months and $1,000 in a year. However, the Fed has argued that it has gone to extraordinary steps to prepare the market for a rate hike over the last several years and gold prices have likely already factored in such a hike.
• According to the World Gold Council’s latest report, a growing middle class in China will spur growth in demand for gold over the next five years. Despite the encouraging forecasts, Jack Klein, executive chairman of Evolution Mining, says not to bet on the Asian middle class to boost gold prices. Klein argues that, “Yes there’ll be increased physical demand, but the gold market is so dominated by financial issues, inflation and the U.S. dollar, that it’s not going to make a huge difference.”
• BMI Research believes that bullion could fall below the $1,000 level during the first half of 2016 once the Fed raises rates and the dollar gains. John Davies, global head of commodities research, says that expectations for gradual tightening will cushion the fall however, with prices returning to about $1,000 and above.

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