Will The Fed Hike Rates Again This Week?

Strengths

• The best performing metal this week was palladium, up 1.41 percent, though hedge funds cut their long position to a three-week low. ICBC Standard Bank, however, sees palladium hitting $1,500 an ounce by 2020. Gold traders and analysts were mostly bullish on the yellow metal this week on concerns about a potential U.S. government shutdown and ongoing uncertainty around Brexit, according to the weekly Bloomberg survey. Gold sentiment is increasing as holdings in gold-backed ETF holdings rise and as investors are unwinding net short positions. Bloomberg writes that U.S. Commodity Futures Trading Commission data shows that among its precious metal peers – palladium, platinum and silver – gold has seen the biggest change in sentiment over the last two months.

• Turkey continues growing its gold holdings after selling off its reserves for most of this year. Bullion holdings rose $69 million from the previous week and are worth $19.4 billion as of December 7, according to the Turkish central bank’s filings. In another sign of gold bullishness, Turkey will begin selling gold-backed bonds in an effort to diversify borrowing instruments. Bloomberg writes that only 22 karat and 24 karat gold will be accepted and that investors will be paid interest in the lira, but may request principal payments back in the form of physical gold.
• South Africa, once the world’s top gold producer, has seen output contract for a 13th consecutive month in October, the longest streak of declines in six years, writes Bloomberg. The country released figures showing production declined 15.1 percent from a year earlier. The Perth Mint Physical Gold ETF saw inflows of 11 percent, or $80.9 million, on Wednesday, marking the biggest one-day increase since September 18.

Weaknesses

·         The worst performing metal this week was platinum, down 0.81 percent with hedge funds flipping this week to net bearish on price direction. High gold prices have dented demand in Asia leading up to the holiday season, with buying interest in India likely to be subdued for the rest of the year, reports Reuters. The world’s top gold consumer China saw premiums of $5.00 to $6.50 over the benchmark, down from last week’s $5.00 to $7.40 range. Gold posted its third straight day of losses on Thursday after a Trump administration official signaled that China will have to do more to end the trade war, writes Bloomberg.

·         Paulson & Co. won control over the Detour Gold board of directors after convincing shareholders to overthrow most of the board, including its interim CEO. It is difficult to ascertain how the market will view Detour going forward in the shorter term window. Certainly, the new directors will have the best interest of shareholders at heart as this is the reason Paulson pushed for change at the company. This board replacement should also be seen as a warning shot to other gold company boards where shareholders believe they are not being served. 

·         Alamos Gold fell as much as 9.3 percent in Canada on Thursday after Desjardins lowered its rating on the stock to hold from buy. The lowered rating is due to company news that it has slowed down development activities and spending on its Kirazli Project in Turkey until it is granted an operating license, reports Bloomberg. Adding to the company’s stock turbulence is the news that two employees are feared dead at the Alamos Mulatos Mine in Mexico after an unexpected pit slope movement.

Opportunities

·         Hedge fund manager Paul Tudor Jones said in an interview on Monday with CNBC that he doesn’t think the Federal Reserve will hike rates at all in 2019 due to the drop in commodity prices putting inflationary pressure on the economy. Jones said we should expect to see “a lot more volatility next year” in the markets and that we’re “probably sitting on a big global credit bubble.” Goldman Sachs said the odds of a rate hike at the Fed’s meeting in March are now below 50 percent due to worsening economic data. Zach Pandl, head of global currency and emerging-market strategy said that “the latest news from the Fed raises our convictions in those forecasts and suggest that the dollar depreciation could be more front-loaded than we previously anticipated.”

·         Martin Roberge of Canaccord Genuity Corp. wrote in a note this week that gold could be set up for a sustained rally and would be the prime beneficiary of a dovish Fed. When the Fed paused following the December 2015 rate hike, the U.S. dollar peaked soon after and there was a monster rally in the gold miners in the first half of 2016. Roberge notes 2019 could be a similar setup if the Fed pauses and oil regains some strength, stroking inflation expectations.

·         Wheaton Precious Metals saw a big boost on Friday after announcing that it reached a settlement with the Canadian Revenue Agency (CRA). The agreement says that income generated through Wheaton’s foreign subsidiaries will not be subject to Canadian taxes, though the company will need to mark-up the cost of service provided to foreign subsidiaries from 20 percent to 30 percent. Wheaton’s stock was trading up 14.4 percent following by the market close. The CRA tax issue has been an overhang on the stock for several years and with the issue finally being put to rest, Wheaton should see money flow back into the shares.

Threats

·         Following a multiyear boom, home sales are starting to slow around the United States. While values in most of the country haven’t fallen, reports Bloomberg, the rate of appreciation is slipping, particularly in the New York area. Another area is slowing too – the number of new hedge funds in this $3 trillion market. In fact, closures have been the new theme in 2018, writes Bloomberg, with closures outnumbering launches for the third year running with hedge funds noting a lack of good opportunities and or converting to family offices and only managing their own assets.

·         The Fed is piling up unrealized losses, raising questions about its finances at a “politically dicey moment for the independent central bank,” reports Bloomberg. Mark-to-market losses at the Fed dwarfed central bank capital on September 30, according to its quarterly financial report. “A central bank with a negative net worth matters not in theory,” former Fed Governor Kevin Warsh said in an email. “But in practice, it runs the risk of chipping away at Fed credibility, its most powerful asset.”

·         Economists at some of the largest banks are beginning to notice signs of a U.S. recession looming in 2019, reports Bloomberg, citing an inversion in part of the bond yield curve and a sell-off in stocks. JPMorgan, specifically, forecasts a 35 percent chance of recession next year, which is up from 16 percent probability back in March. In a global study done by UBS of 40 countries over the time frame of 40 years, the bank says the U.S. is among those currently behaving in a way inconsistent with prior peaks.

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