Will Bullion Investors Take The Long View On Gold?

Strengths

• Although gold got most of the attention this week with its price gains, platinum was the best performing precious metal, rising 5.17 percent.  The price gains in the metal did not transmit to stock gains for the platinum producers though, as the FTSE/JSE African Platinum Index collapsed 28.74 percent for the week.   Despite reinforcement of a December rate hike on news of a strong U.S. jobs report, bullion investors saw past the headline numbers and are taking the long view on gold, according to Bloomberg. Gold prices jumped the most since April, up as much as 2.6 percent. Tai Wong, director of commodity products trading at BMO Capital Markets, said in an interview that the market “seems convinced that once the December hike is out of the way it may be months before the next one…the gold market is moving higher on that sentiment.”
• China’s gold reserves ratio rose to 55.38 million ounces in October. The Chinese central bank website shows an addition of 14 tons made during the month. Other data from the Asian nation shows that China’s Shanghai Gold Exchange withdrawals continued strong, with another 49 tonnes taken out in week ended November 27, bringing the year-to-date total to just over 2,362 tonnes, according to Lawrie Williams.
• Bloomberg reports that India’s gold imports more than doubled during the month of November on the slump in global prices. According to the Indian Express Online, the country’s Sovereign Gold Bonds (SGB) Scheme, however, has seen less-than-impressive debut numbers with the creation of just enough gold backed bonds to be equivalent to about 0.1 percent of the country’s annual consumption of gold of 820 tonnes. Even with the lackluster start to the scheme, the Indian government called the response “excellent.”

Weaknesses

• Gold actually lagged all the precious metals this week.  Selling of gold holdings in exchange-traded products fell for the eleventh consecutive day to the lowest since February 2009, according to Bloomberg data. In November investors sold 49.3 metric tons – that’s around three times as much as they bought in the previous three months combined.
• Gold forecasters from Citigroup estimate that the precious metal will average $995 per ounce next year, with the decline in price being a short-term move and mildly improving to an average of $1,025 an ounce in 2017. Another price forecast from ABN Amro shows the metal at $900 an ounce next year, with the bank citing higher U.S. interest rates cutting the demand for gold.
• Palladium, rising just 2.89 percent this week, significantly lagged the gains made in platinum.  Reports out of Switzerland showed that they were a net exporter of the metal for the second consecutive month in October.

Opportunities

• BCA Research says although higher interest rates could be bearish for precious metals, there is considerable upside risk in these markets. BCA’s 2016 Commodity Outlook states that if we experience 1) a slower-than-expected rates normalization process, or 2) a complete course reversal by the Federal Reserve brought on by a too-strong U.S. dollar causing growth to stall, precious metals could rally. The rally would come in the wake of the short-covering rally that almost surely would follow.
• UBS is calling for a U.S. dollar pullback, according to the group’s latest note. Marc Mueller from UBS’s technical team thinks a December rally is still likely, but with a U.S. dollar pullback we could see a change of leadership – primarily with a rotation into metals and mining, commodities and emerging markets.
• The Global Mining Observer reports that Lundin Gold will announce its stability agreement with the government of Ecuador in the next few weeks. The basic terms of the agreement include a 22 percent tax rate and flat royalties fixed at close to 5 percent and renewable after 15 years. Lundin Gold could “quickly become a major new gold producer” if they can navigate Ecuador’s tax environment.

Threats

• With the Asian economies struggling, jewelry demand could also end up being weak, notes Bill O’Neill, a partner at Logic Advisors.   He sees an undesirable outlook for precious metal: “Fundamentally, the gold market doesn’t look good, psychologically it doesn’t look good and the money flows don’t look good…so that’s a negative trifecta.”
• According to a report from Randgold Resources, a summary of gold industry data shows that total capital injection of $140 billion into the sector (about $90 billion in total equity raised and about $50 billion in total debt raised since 2005) isn’t helping to increase production levels.

Data from Randgold also shows that reserve life is much shorter than portrayed. In order to maintain a lower cost profile, many companies now produce at the economic grade required to make them appear to be low cost. These companies are high grading because these grades are above the reserve grades. As you can see in the chart below, this reduces the average reserve life of the industry.

• Over the past 18 months the U.S. dollar has seen rapid appreciation and triggered a significant drop in commodity prices, reports Sputnik News. This drop includes precious metals, with gold selling at its six-year lowest price. Mark Bristow of Randgold Resources said that “In the medium term, it’s a very bullish outlook for the gold industry. The question is, how long is the gold industry going to supply the market with unprofitable gold?”

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