Is Gold Divorcing The Dollar And Marrying Inflation?

Strengths

• The best performing precious metal for the week was palladium, down just 0.34 percent on little news over the week.  Gold traders and analysts remained bullish for a third week following North Korea’s test of an intercontinental ballistic missile, writes Bloomberg News.
• The Federal Reserve’s recent meeting showed a lack of consensus on when to shrink its balance sheet, reports Bloomberg, along with how to approach policy strategy at a time of low inflation. Gold held on to its gains following the release of the meeting’s minutes this week.
• Joni Teves at UBS writes that right now gold appears fragile, particularly with market participants digesting a hawkish shift in tone among key central banks of late. She adds that the yellow metal is currently being helped by lean positioning and dollar weakness.

Weaknesses

• The worst performing precious metal for the week was silver, down 6.09 percent.  Silver prices plunged as much as 10 percent, as greater than 25 million ounces traded in just under a minute in Singapore on Friday morning. China’s gold reserves remain unchanged for an eighth month.  China’s central bank previously raised its gold assets every month through October, aside from one, after announcing a 57 percent jump as of June 2015, reports Bloomberg. 
• Gold is set for a fourth weekly loss in five, reports Bloomberg, while silver fell to the lowest level in 15 months. Central banks are moving in synch to tighten policy, boosting yields, curbing liquidity, and hurting some assets including precious metals, the article continues. Gold futures pare declines following the report showing U.S. hiring picked up in June while wage gains disappointed yet again, reports Bloomberg. “Wage growth has stalled, and that could mean inflation is also stalling,” Phil Streible with RJO Futures said. Ric Spooner with CMC Markets commented that yields are rising in response to a market rethink on the timing of central bank plans to reduce QE programs, noting this as a short-term negative for the gold price.
• Tahoe Resources saw its share price decline by nearly 40 percent on news out of a Guatemalan court that their mining license in the country had been suspended.  President Jimmy Morales expressed dismay over how the opinion could hurt further investment in the country but told lawmakers if there is a law for such an activity as mining and we don’t want that activity, then change the law.

Opportunities

• Gold miners have cut costs but trade at a fraction of peak valuations, reports Bloomberg Intelligence. Since peak levels in 2008, gold-miner valuations have fallen over 50 percent based on enterprise value to reserves and resources. Miners have cut staff, focused on shrinking debt and are using new technology to garner cost efficiencies, the article continues, and valuations don’t yet reflect these efforts. So, do the miners see the value opportunity? Yes. In fact, CIBC World Markets reports that gold miners have invested around $290 million in exploration companies during the first six months of the year, the highest level recorded in the past decade. In addition, nearly half of equity raised by junior gold stocks on the TSX this year has been through direct investments – no previous year has exceeded 20 percent, CIBC continues.
• UBS Wealth says it’s neither bullish nor bearish on gold right now, but does recommend investors buy the yellow metal near the $1,200 range for insurance, selling it again near the $1,300 range, reports Bloomberg. Wayne Gordon, executive director for commodities and foreign exchange at UBS, says this is because the group has a view that real rates go sideways. A similar report from Canaccord this week notes that gold prices were down in June despite weakness in the U.S. dollar. “This confirms our view that gold is divorcing the U.S. dollar and marrying inflation,” the group writes.
• The cost of bearish over bullish contracts in the SPDR Gold Shares ETF has dropped to the lowest level since the election of Donald Trump, reports Bloomberg. Capital Gold Group reports that commitment of traders (COT) speculative positions are now at very attractive levels for entry in physical gold and silver, according to analysts from Reuters and Seeking Alpha. For a third week, the COT Report reflected speculative longs cut back on their long positions, during a time when the gold price rose 0.59 percent – suggesting strength in gold outside of these pullbacks. Lastly, Peter Berezin of BCA believes gold will finally have its day in the sun once the Fed starts cutting rates in 2019 and stagflationary forces begin to gather steam in the early 2020s.

Threats

• Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas (and one of the most bearish forecasters), is betting bullion will drop from $1,225 an ounce Thursday, to $1,165 an ounce in the fourth quarter. BNP expects the next rate increase in December and Tchilinguirian said in an email that investors will face “a greater opportunity cost of holding gold” as the Fed hikes drive real rates higher, reports Bloomberg.
• According to Bloomberg, electric cars will outsell fossil-fuel powered vehicles within two decades as battery prices plunge. The adoption of emission-free vehicles will happen more quickly than previously estimated because the cost of building cars is falling so fast, shows the Bloomberg New Energy Finance forecast. In fact, Volvo recently vowed the end of combustion cars, saying that every new model launched from 2019 will have an electric motor.  These shifts could depress future demand for the platinum group metals.

Banro Corp. suspended operations at one of its two gold mines in the eastern Democratic Republic of Congo, reports Bloomberg. A convoy of trucks was seized when it was trapped at the cross-fire as the national army battled an armed group, the article continues. In addition, the South African rand fell to a seven-week low against the dollar after the African National Congress was said to propose that the Reserve Bank should be fully state-owned, writes Bloomberg. This fuels concern that the ruling party may target the central bank’s independence.