Gold Stocks Outperform Bullion For Past Five Weeks

Strengths

·         The best performing metal this week was gold, up 0.14 percent. St Barbara produced a record-breaking 403,089 ounces, up 6 percent from the 2017 fiscal year, according to Bloomberg. This is the first time the company has exceeded 400,000 ounces in a year. Mining in higher grade zones of the South West Brank resulted in an average grade of 13.2 grams per ton of gold. At June 30, the total cash at bank and term deposits was A$344 million, up from A$262 million on March 31.

·         Top officials at the Chinese Central Bank gave their assurances on Tuesday that yuan devaluation would not be used as a weapon in the trade war despite speculation that the weakening currency is a deliberate attempt to gain an advantage over the United States. The yuan lost 3.7 percent over the past three weeks, making it the worst performing currency in Asia for the period. “Since the start of the week, everyone’s become a lot more nervous about what’s happening in China,” says currency and metals strategist Georgette Boele of ABN Amro. 

·         The yuan’s share in the Russian Central Bank’s foreign-exchange and gold assets almost tripled in the last three months, jumping from only 1 percent in the third quarter to 2.8 percent. “The rise in the share of yuan assets… reflects Russia’s intentions to diversify away from major currencies,” said emerging markets currency strategist Piotr Matys. Russian policymakers cited China’s economic success in the past year and the renminbi’s appreciation against the U.S. dollar to explain their decision to buy yuan.

Weaknesses

·         The worst performing metal this week was platinum, down 1.02 percent as declining European diesel sales continue to weigh on demand.  Platinum is used to reduce emissions in diesel engines and that segment of the automobile market has fallen to 38 percent versus a year ago at 47 percent in wake of the VW emission rigging scandal. Gold imports to India dropped over 25 percent in June from a year earlier, reports Bloomberg. The rupee’s extended slump hit record lows last month, making overseas goods more expensive. Between the weaker rupee and changing attitudes among Millennials, Indian jewelers are struggling to gain new customers as young, urban professionals increasingly choose vacations, electronics and other luxuries over jewelry. India’s gold consumption has been declining since 2010 due to government crackdowns on “black money,” which moves outside the official economy and escapes taxation.

·         Centerra Gold’s Mount Milligan mine is facing a water shortage that could impact production. The company has requested the BC Environmental Assessment Office update its environmental assessment to allow for access to additional ground- and surface water sources through 2020. Without additional water, Centerra could see decreased output levels in quarter four of 2018.

·         Exchange-traded funds with a focus on commodities experienced outflows for the eighth straight week, reports Bloomberg. Precious metal funds also suffered from outflows, with SPDR Gold Shares experiencing the steepest loss at $686 million. However, VanEck Vectors Gold Miners added a net $178.2 million in a single trading session, increasing the fund’s assets by 2.1 percent, according to Bloomberg. This is the largest one-day increase since May 29 and the twelfth straight day of inflows.

Opportunities

·         As seen in the chart below, gold stocks have outperformed bullion for the past five weeks. In fact, the spread between the two shows outperformance of gold equities by over 500 points.   This increase in the value of the gold mining companies relative to gold is borne out by the money flows cited in the prior bullet point, in that money is coming out of precious metal funds and instead are buying the stocks of the companies that mine gold. Perhaps this rotation is anticipating the seasonal buying pattern in the yellow metal, which normally rises as the fall season approaches, but the stocks can perform much stronger than gold bullion itself.

·         Forecasts from Australia, the world’s second-largest producer of gold, expect the yellow metal to “perform well” in the second half of 2018, reports Bloomberg, namely due to political uncertainty and trade tensions. The Department of Industry, Innovation and Science said in its quarterly commodities outlook, “Any sustained overheating in the U.S. economy would likely see inflation rise and gold demand rise, as investors seek an inflation hedge.”

·         Commodity bull Goldman Sachs says the trade war between China and the U.S. will have an economic impact, but a “small” one, reports Bloomberg, particularly when it comes to the threat on raw materials. The investment bank forecasts a 10 percent return on commodities over 12 months as the dollar drops, and reiterated its bullish call on crude oil. In another bit of news this week, it seems that returns on U.S. Treasuries have turned Japanese investors sour on America. In reaction to Japan shedding Treasuries, investors there have plowed record amounts into U.S. stocks, corporate bonds and agency-backed securities, writes Bloomberg.

Threats

·         According to Bloomberg, the U.S. dollar could be the best place for global investors to find safety amidst a trade war and higher rates from the Federal Reserve.  “That’s because the conflict is unfolding alongside what could be an even more powerful dynamic: U.S. monetary-policy normalization,” the article continues. Demand for the dollar is rising higher, leaving gold (historically known as the safe-haven asset) to drown. In fact, the yellow metal is heading for the lowest close in a year.

·         U.S. authorities demanded documents related to possible corruption and money laundering from Glencore Plc this week, sending the stock down the most in two years. “The documents relate to the company’s business in Nigeria, the Democratic Republic of Congo and Venezuela from 2007 to present,” reports Bloomberg. Two days after the plunge in price, Glencore announced that it will spend up to $1 billion buying back its own shares before the end of the year. Some analysts say this buyback plan makes major acquisitions by Glencore less likely in the near future.

·         The Associated Press reported on Friday that some immigrant U.S. Army reservists and recruits who enlisted in the military with a promised path to citizenship are quietly and abruptly being discharged. Immigration attorney and retired Army Reserve lieutenant colonel Margaret Stock, who helped create the immigrant recruitment program, said she has been inundated over the past few days by recruits being discharged. “Immigrants have been serving in the Army since 1775,” Stock said. “We wouldn’t have won the revolution without immigrants. And we’re not going to win the global war on terrorism today without immigrants.”

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