GOLD SWOT: Following Softer U.S. PPI Data, Gold Extended Its Gains Last Week

Strengths

• The best performing precious metal for the week was gold, up 0.08%, but just slightly, as a soft PPI data for December amped up expectations of interest rate cuts. In addition, U.S.-led airstrikes on Houthi rebel targets in Yemen likely raised demand for precious metals this week. Vizsla Silver reported an increase in resources at its flagship Panuco project in Mexico. The updated estimate outlined a 48.7% increase in indicated resources to 155.8 million ounces of silver equivalent contained within 9.5 million tons of ore grading 511 grams per ton silver equivalent.

• According to BMO, Sandstorm announced it sold 23.3k ounces GEOs in the fourth quarter of 2023, above the company’s estimate for 21.3k ounces GEOs during the quarter. Preliminary revenue during the fourth quarter is $44.5 million, while the cost of sales, excluding depletion, is for $4.9 million.
• According to Stifel, K92 Mining released fourth quarter production and operational results. Production came in at 39.1k ounces gold, 21% higher than the expected 32.0k ounces gold. Full-year production of 117.6k ounces gold beat the downwardly revised annual guidance of 111-116k ounces gold. The underground mine development rate was a quarterly record of 2,649m - a 19% increase year-over-year and quarter-over-quarter and ongoing improvements are expected as new equipment arrives.

Weaknesses

• The worst performing precious metal for the week was palladium, down 5.65%, as most industrial metals fell in price on weaker sentiment toward economic growth. According to Bank of America, against continued uncertainty on when the Federal Reserve will cut rates and with EURUSD back at levels from late-
• November, investors have broadly stayed on the sidelines. This shows that assets under management at physically backed ETFs have flat lined, although they are no longer falling as fast as earlier in 2023.
• Gold resumed its slide after whipsawing moves at the end of last week, with a recent rebound in the dollar and U.S. bond yields posing a threat to the precious metal’s appeal. Spot gold prices fell as much as 0.9%, coming back under pressure after choppy trading as investors parsed U.S. jobs and services data for clues on the likely timing and size of Federal Reserve interest-rate cuts.
• So far in January, silver has been materially underperforming gold. The Gold/Silver ratio has shot up to 89, the highest since March 2023, indicating that at present silver’s bullish drivers are losing the battle. Industrial and jewellery fabrication demand are exposed to several risk factors this year. Global silver demand is estimated to have fallen by 10% last year to 1,143 million ounces and could be lower again this year if photovoltaic installations slow following the surge in 2023 and other industrial applications see a decline.

Opportunities

• Scotia continues to expect margins to be supported by the robust gold market. The group also believes that sticky inflationary pressures will persist (such as labor cost inflation) especially in tight markets like Canada and the U.S., leading to flat or higher costs year-over-year. 2024 could see a continuation of active M&A for Scotia’s coverage universe.
• Morgan Stanley argues that gold is fairly valued at around $2,025 per ounce. Non-commercial net longs are the highest since May 2022, gold's sensitivity to real yields is fading and geopolitical risk remains elevated, but seems largely priced in. However, as the year progresses, if gold's safe haven premium holds, the risk-reward is probably more skewed to the upside. Looking back to 1990, gold has been on average 6% higher 30 days after the first rate cut. On top of this, even with a shallower regression line, a 100 basis point drop in real yields would imply another 5% upside for gold, while the bank would expect central bank buying to remain strong, supporting physical demand too.
• India’s reliance on imports of silver paste, a key material for making solar modules, highlights the challenges of localizing the solar supply chain. Silver paste is the largest component of the cash costs in converting photovoltaic wafers to cells, and accounts for about 7% of module cost currently. India’s solar manufacturers imported record-high volumes of silver paste in the first nine months of 2023, according to a Bloomberg NEF analysis of third-party trade data.

Threats

• This week the SEC gave the green light to the creation of Bitcoin ETFs and in no time flat, billions of dollars crossed hands for Bitcoin in lieu of cash. Bloomberg reported that during a recent interview on CNBC’s Squawk Box, Blackrock CEO Larry Fink drew a parallel between Bitcoin and gold, stating that Bitcoin is “no different than what gold represented for thousands of years.” Fink also argued
• Bitcoin is unique because it has a limited supply, unlike gold. Since the launch of this major liquidity event for Bitcoin trading on Thursday, Bitcoin has fallen more than 6% while gold is up more than 1.5%. Betting on gold for the next 1,000 years might be the safter wager.
• According to Bank of America, palladium has been under pressure on a confluence of factors, including rising EV penetration rates. With palladium demand driven to 90% by car manufacturers, this is a structural headwind. Touching on the dynamic, Heraeus notes that the "Loss of EV subsidies in Germany may slow conversion from gasoline light vehicles. In December, the German government prematurely ceased its EV subsidy programme after the government budget was left €60 bn short following a court ruling. The programme was intended to be in place until the end of 2024 and provided up to €4,500 toward the purchase of a personal electric vehicle".
• Newmont shut a mill at its Telfer mine in Western Australia due to safety concerns over tailings facilities, The Australian reports, citing a company spokesman. The mill is unlikely to return to operation until at least the end of the month, with potential for the shutdown to last as long as eight weeks, the paper says, citing unidentified people familiar with the matter.

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