UBS Recommends Buying Gold On Dips

Strengths

• Platinum was the best performing precious metal, although it still suffered a loss of 1.61 percent for the week.  Platinum had held up pretty well for most of the week but slipped below $1,000 an ounce on Friday. Impala Platinum noted it sees its output rising 17 percent in 2016.
• India has regained the top spot from China as the biggest overall consumer of gold in the first nine months of this year with total consumption of 642 tons. China is trailing by just 63 tons.
• Gold consumption in mainland China may match or exceed the record in 2013 after financial market turmoil and the yuan’s devaluation have boosted the metal’s appeal. Further, China’s net imports of gold from Hong Kong increased for the third month in September as lower prices and inventory building before a week-long holiday spurred buying. Net purchases rose to 96.6 metric tons from 54.7 tons in August and 61.7 tons a year earlier.

Weaknesses

• Palladium was the worst performing precious metal, falling 2.48 percent for the week. Momentum in gasoline auto sales is likely to fall as pent up demand has largely been satisfied and consumers do not appear to be abandoning diesel powered vehicles.
• Disappointing earnings releases from Alamos Gold, New Gold, and Goldcorp sent the stocks on a downward spiral this week that saw prices collapse by more than 15 percent. Goldcorp reported third-quarter profits that missed analysts’ estimates. The company’s net loss was $192 million, or 23 cents per share, wider than the loss of $44 million, or 5 cents per share, a year earlier.

• For more than a month, investors had been piling into gold anticipating that the Fed would be forced to keep U.S. interest rates near a record low for longer. However, Fed officials announced Wednesday that they expect moderate growth for the economy and left open the option to raise rates in December. As a consequence, prices dropped immediately after the policy statement, retreating from the biggest gain in more than two weeks.

Opportunities

• BCA points out that perhaps market participants are reading too much into this week’s Fed statement, as it suspects the Fed had become annoyed that the market had moved so quickly to price out a December rate hike. As such, hawkish language was designed to give the Fed more maneuverability as well as to restore the view that it was the Federal Open Market Committee (FOMC), and not the investment community, that was in charge of monetary policy.
• BCA is also worried that the Fed does not fully appreciate the extent to which the unleashing of all the pent-up demand that was accumulated during the recession has helped sustain growth during the recovery. For example, auto sales went from a low of 9 million in 2009 to 18 million today. Clearly, sales are not going to increase by another 9 million over the next few years. BCA states the same is true for capital expenditures and orders for core capital goods were down 7.7 percent year-over-year in September, the biggest decline in six years. The economy may not have the depth to withstand a policy mistake by the Fed.
• UBS recommends buying gold on dips as holding gold against tail risks would be attractive for longer-term investors, especially against the backdrop of broader macro uncertainty and potentially lower real rates than anticipated.

Threats

• According to GFMS, the research unit of Thomson Reuters, gold is set to remain under pressure until there is more clarity on the timing and the scale of U.S. rates normalization. It expects that gold could drop below $1,100 in the fourth quarter.
• India’s government is set to issue sovereign gold bonds beginning November 26. Investors will receive interest of 2.75 percent per year, payable semi-annually. Commission for distribution shall be paid at a rate of 1percent of the subscription amount.  India hopes the scheme will lower the country’s appetite for imported gold by creating a mechanism that encourages the recycling of idle gold.
• Venezuelan central bank gold holdings declined by 19 percent between January and May of this year, according to its financial statements, likely reflecting gold swap operations and lower bullion prices. This underscores the efforts the government is taking to raise the cash to repay creditors and fund imports amid a punishing recession, inflation exceeding 100 percent and a collapse in the price of oil, its main export. With $3.5 billion of bond payments due this week and next, the country’s international reserves are hovering near a 12-year low and there potentially could be some gold sales by Venezuela to meet debt payments.

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Courtesy of http://usfunds.com/