Rising Inflation Could Lift Gold Prices

Strengths

The best performing metal this week was palladium, up 0.52 percent after rallying hard after a six percent drop mid-week, largely on talk of trade tensions easing. Inflation is creeping into the market, which has historically been positive for the price of gold. U.S. consumer sentiment fell to the lowest level in almost a year, according to a University of Michigan report. Bloomberg writes that this could be a possible caution signal for spending following strong gains in the second quarter. The report also showed that buying conditions for large household durable goods fell to the lowest in four years, car-buying views were the lowest since 2013 and home-buying conditions are the least favorable in about a decade. Another sign of inflation is in Deere & Co.’s lower earnings due to higher freight and raw material costs. Steel prices are rising due to tariffs on imports and freight costs are up due to higher oil prices and a shortage of big-rig drivers. Bloomberg writes that “cost inflation is marring what is proving to be a strong uptick in demand for agricultural-machinery.”

·         Hedge-fund manager Ray Dalio has kept his faith in the two biggest ETFs backed by gold, even as other investors have backed away, reports Bloomberg. As of the end of the second quarter, Dalio’s Bridgewater Associates had 3.9 million shares in SPDR Gold Shares and 11.3 million in the iShares Gold Trust, according to regulatory filings. Ten-year real yields are down 10 basis points since the start of the month which likely helps to stall the dollar. A stronger dollar has kept investors away from gold, which may no longer viewed as the traditional safe-haven asset. However, Rick Rule, chief executive officer of Sprott U.S. Holdings Inc. doesn’t think this trend will last. Rule said that U.S. investors “will begin to diversify their risk-off trade to include, among other things, gold” after they shift focus away from the U.S. dollar relative to other currencies.

The first bullion-backed ETF guaranteed by a government has launched on the New York Stock Exchange. Australia’s Perth Mint Physical Gold ETF (AAAU) started trading on Wednesday and allows shareholders to exchange their shares for gold and have the physical metal delivered to their doorstep by Perth Mint. Richard Hayes, the Perth Mint’s chief executive officer, said that “we believe investors will have greater confidence with the knowledge that their wealth is physically stored in one of the most secure central bank grade vaults in the southern hemisphere.”

Weaknesses

·         The worst performing metal this week was platinum, down 4.83 percent as speculators increased their bearish position. The yellow metal continues to decline as gold prices fell below $1,200 per ounce this week. Gold is heading for its fifth monthly loss as the dollar continues to climb, for the worst run since 2013, writes Bloomberg. Gold traders and analysts have a bearish outlook in this week’s Bloomberg survey as the gold price sank to its lowest in more than 19 months.

·         Money managers are making their biggest bets that prices will decline even further as investors are exiting gold ETFs and open interest for futures is dropping. Gold mining stocks are also falling as an index of bullion-mining companies tracked by Bloomberg Intelligence fell to the lowest in more than two years for a seventh straight loss on Tuesday. This week was the fourth straight week of commodity ETF outflows. Outflows from U.S.-listed commodity ETFs totaled $694 this week compared to withdrawals of $538 the week prior, according to Bloomberg data. Precious metals funds saw outflows of $495, compared with $399 of outflows the previous week.

·         South Africa’s gold mining industry continues to weaken as the nation’s production fell for a ninth consecutive month. Gold Fields Ltd, which owns the world’s second-biggest known body of gold-bearing ore, the South Deep mine in South Africa, continues to face trouble. The South Deep mine has the potential to produce for 70-years, however the project loses around $7 million per month due to high costs and low volumes of output. The company has said it might cut 1,560 employees and contractors at the operation, reports Bloomberg. South African gold producers are also facing labor strikes from workers who are demanding pay raises. In talks this week, the labor unions rejected pay increases from four producers.

Opportunities

·         Several miners posted positive drill results this week at various projects. Barsele Minerals Corp. reported results of 4.12 grams per ton of gold at 27 meters at their Swedish project. Pure Gold Mining Inc. reported surface drilling results at their Madsen Gold Project in Ontario of 32.9 grams per ton over 1.7 meters, 14.5 grams per ton over 1.5 meters, 12.7 grams per ton over 1.7 and more. Lastly, Novo Resources Corp. has announced the continuity of an upper gold-bearing conglomerate from the Comet Well to Purdy’s Reward.

·         Jaguar Mining fell by 25 percent on Wednesday after releasing news production guidance was being reduced for the year and that Rodney Lamond is leaving his position as chief executive officer and director. This will be the third CEO that the Board of Directors at Jaguar has chewed through in two years.  As a CEO, Rodney probably spent more time in country at the mine site trying to orchestrate a turnaround than most CEOs in the mining industry.  Rodney previously was instrumental in the turnaround of Crocodile Gold which became Newmarket Gold and was later taken out by Kirkland Lake Gold. According to Bloomberg, Rodney owned a little more than 2.1 million shares in Jaguar (0.65 percent of outstanding shares), almost 6 times more shares than the Chairman of the Board, Richard Douglas Falconer. As a shareholder of Jaguar, the problem in our opinion is not Rodney, but is the Board of Jaguar.  According to Glass Lewis & Co., a proxy rating service, the Jaguar Board cannot even keep attendance records of who attended what corporate governance meeting in the last year.  The Board of Jaguar mining will now need to be reminded of whom the owners of Jaguar mining really are and how we expect the company to be run.  The Chairman, Richard Douglas Falconer will have to be replaced, among others and therein will be the opportunity.

·         Shares of Canyon Resources Ltd. are up 100 percent in two weeks after the company was granted exploration permits for a bauxite project in Cameroon.  This is a world class ore body where the previous owner defined a large high-grade and low impurity bauxite deposit of 550 million tonnes averaging 45.5 percent bauxite and only 2 percent silica.  Canyon managing director Phillip Gallagher noted the deposit is adjacent to rail with suitable access to port infrastructure.  Also, that only about 40 percent of the prospect has so far been tested within the permit area and he expects the resource can be expanded.

Threats

·         UBS writes that gold will continue to be under pressure and sees $1,125 as a strong support level for the yellow metal, which is still well below the current price. Gold sank to its lowest level in more than 19 months this week, even as global equities came under pressure, writes Bloomberg. Richard Hayes, the chief executive officer of Australia’s Perth Mint, said that investors have grown immune to economic and geopolitical risks, such as trade wars and the Turkish lira, which would normally drive safe-haven demand for gold. Hayes said “The world, to some degree, has been quite used to bad news,” which has been the reason behind gold’s months-long slump.

·         Goldman Sachs wrote this week that there is no serious risk of a recession due to the flattening of the yield curve. The bank said that three out of the last 10 times the yield slope inverted, there was no recession over the following two-year period. However, seven of those 10 times there was a recession. Seventy percent of the time we get a recession?  Not too comforting, Goldman.

·         Companies are expected to be bringing back to the U.S. $1.5 trillion in corporate cash due to the tax overhaul passed last year, with $400 billion already repatriated, according to Invesco estimates. Bloomberg writes that the new tax law sets a one-time repatriation rate for untaxed cash held abroad – a 15.5 percent charge on cash and liquid assets which can be paid for over eight years. Previously these funds were hit with a 35 percent corporate tax. This could lead to further strengthening of the U.S. dollar if those proceeds are not already held in U.S. dollars overseas.  The knock on effect could be tough for some companies.  Cisco Systems pulled $5 billion from Deutsche Bank’s asset management arm.  This amounted 40 percent of their redemptions in the first half of the year.

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