Gold Moves On Safe-Haven Demand

Strengths

•The best performing precious metal for the holiday-shortened week was silver, up 3.01 percent, followed by gold, up 2.66 percent as geopolitical risks surrounding Syria and North Korea sparked demand for haven assets. Gold settled above its 200-day average for the first time since November, reports Bloomberg.

•Indian gold imports surged nearly seven-fold, or 582 percent, in March from a year earlier, reports Bloomberg.  Jewelers stocked up on the yellow metal in anticipation of a demand recovery during the wedding season that began this month, with shipments advancing to 120.8 metric tons since last year, the article continues.

•The U.K. Royal Mint’s gold sales jumped 20 percent during the first quarter of the year, reports Bloomberg, following month-on-month declines in January and February. In volume terms, March sales jumped 263 percent, while gold sold and stored by the mint under its Signature Gold program—which allows partial ownership of bars held in its vault—jumped 178 percent in March.

Weaknesses

•The worst-performing precious metal for the week was palladium, down 0.85 percent.  Hedge funds had boosted their net-long position in the futures market to a two-year high in the prior week just as a report came out the following week that U.S. auto sales slumped in March.

•The London Bullion Market Association (LBMA) PM gold price was set nearly $15 below spot on Tuesday, reports Kitco News, once again putting the market’s transparency in the spotlight. Jeff Christian, managing director at CPM Group, says he sees this as the effect of poorly conceived regulations and a faulty price discovery mechanism. Because banks and financial institutions are backing away from becoming market makers, Christian says this has resulted in a sharp reduction in liquidity during the auction process, creating a large discrepancy in prices. “There is something wrong with the process. You have a working spot market and then you have to stop that to then go over to this auction,” he added.

•Gold’s rally steadied earlier in the week on the back of U.S. jobs data that is consistent with the economy growing at 2 percent this year. “The U.S. jobs data was weaker than expected and these provided good support to gold until investors digested the data,” Brian Lan, managing director of GoldSilver Central, said over email. Other news comes from Centerra Gold this week, which reported a fatality at its Kumtor mine in the Kyrgyz Republic. According to Bloomberg, on April 11 a vehicle mechanic was fatally injured while inspecting a light vehicle pickup truck in the field.

Opportunities

•President Donald Trump had a few notable remarks this week, the first being that he will not brand China a currency manipulator, as he previously promised as part of his election platform. As for the second, he thinks the U.S. dollar is too strong, making the U.S. noncompetitive globally as other countries continue to devalue their currencies. Although the dollar dropped after these currency remarks, gold jumped around $8 on the news, potentially setting the backdrop for further gains.

•This week’s quote of the week comes from Secretary of State Rex Tillerson on the matter of chemical weapons in Syria: “The Russians are either complicit or incompetent.” Tillerson seems to have found his voice after enduring criticism of being silent and sidelined in the Trump administration. He traveled to Moscow to deliver his message of disappointment to Russia for its inability to deliver and oversee Syria’s supposed removal of chemical weapons.  And just to make sure that anyone thought “59 and done” Tomahawk missiles launched into Syria was where the Trump administration was stopping, it was revealed on Thursday that the U.S. dropped the massive “Mother of all Bombs,” the largest non-nuclear bomb in the world, on suspected terrorist camps in Afghanistan.

•According to BMO Capital Markets, there will be a massive rebalance trade around the GDXJ ETF rebalances in June 2017, including significant demand for around 18 potential new additions, as well as a large selling of existing GDXJ names. There are some huge flows around these gold names, with an average daily trading volume of eight days of volume. The ETF will need to sell $3 billion worth of its existing holdings to buy the new additions, which will create a massive funding trade significantly impacting existing names. On this note, don’t think you can front run the front runners.  The brokers, which are Authorized Participants to create the shares for the ETF, will spend the next eight weeks going short and long the expected index changes, largely excluding any outside parties from getting a piece of the trade. Speculators who show up to trade on the rebalance date likely won’t get the price they expect. So over the next eight weeks, we may see some market impact from the pre-rebalance of the index, but keep in mind the GDXJ ETF is about suppling beta to investors. They need the most liquid names to deal in, but this will be a great opportunity to pick up some small-capitalization, high-quality growth names that deliver alpha to investors.

Threats

•The threat of a government shutdown is looming. Government funding expires on April 28, reports Bloomberg, giving Congress five days to “unveil, debate and pass an enormous spending bill, or trigger a government shutdown.” Paul Brace, a congressional expert at Rice University, is even quoted as saying: “It was so much easier when all you had to do was oppose Obama.” There is an exception, the article continues, with a bipartisan group of lawmakers who have been quietly negotiating an omnibus spending bill that would fund the government through the end of the fiscal year on September 30. The border wall decision remains a wild card if it’s included in the budget.

•Although the bond market seems to be focused on what will happen once the Fed whittles down its investments in U.S. government bonds, perhaps more attention should be paid to an even bigger debt pile that could draw buyers away from Treasuries at just the wrong time, writes Bloomberg. “In overseas markets, more than $3 trillion of negative-yielding government bonds—which all but guarantee losses for buy-and-hold investors—have turned positive in recent months,” the article continues. Consequences for the U.S. bond market could be great, as foreigners who previously poured lots of money into higher-yielding Treasuries may be less inclined to do so now that they have “more viable fixed-income options at home.”

•Goldman Sachs maintains its overweight recommendation on commodities but sees a short-term decline for gold, reports Bloomberg. The bank sees the yellow metal falling to $1,200 an ounce in three months, on improvement in hard U.S. growth data and subsequent increases in real rates. Similarly, BMI Research says that the Fed’s rhetoric on balance sheet contraction, together with a stronger dollar, and declining credit growth and inflation expectations, are negative for gold.

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