Russian Gold Reserves Highest In Putin’s 18 Years In Power

Strengths

·        The best performing metal this week was silver, down 0.68 percent. According to the National Association of Realtors, sales of previously owned U.S. homes fell in May for a second month due to a lack of inventory and higher asking prices. Data shows that the median sale price increase 4.9 percent year-over-year to a record of $264,800.

·         Russia sold $47.4 billion of U.S. Treasuries in April, which is more than any other major foreign holder. Bloomberg reports that the country’s gold reserves are now at the highest of President Vladimir Putin’s 18 years in power. Russia’s central bank holdings increased by 1 percent in May and now stand at 62 million troy ounces valued at $80.5 billion. Why might Russia be increasing its gold holdings? U.S. Treasuries are typically viewed as a safe haven asset, however, since Russia is feuding with the U.S. due to sanctions, the nation is moving toward gold – another perceived safe haven asset. Another nation flocking toward gold is Kyrgyzstan. In an effort to protect itself from currency volatility in China and Russia due to economic standoffs with the U.S., the central Asian nation is working to grow its share of gold in its $2 billion international reserves from 16 percent all the way to 50 percent, writes Bloomberg.

·         The VanEck Vectors Gold Miners ETF saw its biggest weekly inflow in more than four months this week of over $200 million. Wednesday, June 20, was the biggest one-day increase since March 26 and the fourth straight day of inflows for the ETF. However, gold bullion-based ETFs cut 180,578 troy ounces of gold from their holdings to mark the fifth straight day of declines on Friday. Bloomberg writes that precious metals funds had $119 million of losses this week, compared with $408 million of outflows from the previous week. This shows that money is rotating into gold stock ETFs since they are outperforming bullion itself.

Weaknesses

·         The worst performing metal this week was palladium, down 3.30 percent. Gold futures fell to an almost six-month low as the growing trade spat between the U.S. and China pushed the dollar up to an 11-month high. Hedge fund managers betting on gold this week after last Friday’s sell off were again unrewarded as bullion gave up almost $10 this past week.

·         The new steel and aluminum tariffs are bringing in big bucks to the U.S. So far the Trump administration has collected $775 million from the metal import tariffs and the Commerce Department expects to reach $1 billion in six weeks. President Trump said on Wednesday that “one thing no one talks about is the money pouring into the Treasury. These tariffs are billions and billions of dollars.” Tariffs are taxes that ultimately raise the price of goods to the consumers bearing the inflation hit.

·         Evy Hambro, manager of Blackrock Inc.’s World Mining Fund, said this week that investors “have lost a bit of patience with regard to their exposure to gold because they’ve been frustrated that it hasn’t been delivering returns. Although gold is historically seen as a safe haven asset during times of geopolitical turbulence, it has not been performing that role recently. Darwei Kung, portfolio manager of the Deutsche Enhanced Commodity Strategy Fund, says that gold’s appeal is dulled due to President Trump’s fickleness and that investors are flocking toward the dollar and U.S. Treasuries rather than gold due to high transaction costs for bullion.

Opportunities

·         Nearly a dozen of the major banks have been named in lawsuits alleging manipulation in the metals markets with three class action suits on gold, silver and platinum and palladium. HSBC and UBS are named in all three lawsuits plus Barclays and Scotiabank are involved in both the silver and gold suits. This is positive in the sense that the manipulation is being recognized finally instead of saying that it doesn’t exist by the regulators. Bloomberg writes that plaintiffs are seeking tripled damages for artificial pricing on trillions of dollars in trades.

·         Orion Resource Partners formed a deal to increase its holding to 80 percent in Dalradian Resources Inc., which is developing a gold mine in Northern Ireland. Orion is offering $1.10 per share, a 62 percent premium, valuing Dalradian at around $400 million. The Dalradian deal is actually more of a take-under transaction in that only about of the 1/3 to just 1/2 of its value would be realized if shareholders vote to approve the transaction.  The reason this lowball bid might succeed is that the  fast money that is active in the gold mining space is just trading the gold stock ETFs for their beta to gold, while alpha trades on specific companies are being ignored.  Billionaire hedge fund manager John Paulson believes that Detour Gold Corp. should put itself up for sale due to stock losses and managerial missteps.  Detour still needs to release its new mining plan in a couple of weeks before any bidding emerges in what could be the next take-under.  Arizona Mining received an all cash bid totaling $1.3 billion for its Taylor lead-zinc-silver carbonate replacement deposit.  This was very positive for Barksdale Capital which was up 46 percent for the week on the Arizona Mining news as Barksdale controls the adjacent land position where the Taylor deposit runs onto their ground.  The valuation gap between the two companies is $20 million market cap for Barksdale’s Sunnyside deposit versus $1.449 billion for Arizona Mining.  Asarco drilled the Sunnyside in 1980 and hit the same ore beds as Arizona Mining has its property.  In addition, Asarco did intercept the porphyry copper deposit at depth, the source for the mineralizing fluids, but the copper grade of 0.44 percent was not economic in the 1980s, although deposits of that grade are being mined today.

·         Jim Rickards says that now is the perfect environment for gold since the Fed is tightening into weakness and will eventually over-tighten and cause a recession. In a recession the Fed typically cuts interest rates 300 basis points to lift the economy, however if a recession arrives in the near future, the Fed won’t be able to cut rates 3 percent if they’re only between 1.75 and 2 percent now. David Rosenberg, chief economist and strategist at Gluskin Sheff & Associated, told conference attendees this week that “Cycles die, and you know how they die?  Because the Fed puts a bullet in its forehead.”  No surprise Rosenberg thinks the S&P 500 has peaked and sees a recession in 12 months.  Jefferies is bullish on mining and commodities, citing in a new report that it’s due to a lack of supply growth.  Below we updated the trailing 5-year measure of inflation using the two New York Fed’s Underlying Inflation Gauges.  One is only price data and it is compounding at 1.56 per over the measurement period while the full data set measure, which contains non-price data like inventory changes for example, had been compounding at 12.75 percent over the same period with much of the rise occurring in the last couple of years.  The NY Fed noted in its seminal research paper printed in 2017 that the full data set may be a better predictor of future inflation.

Threats

·         Bloomberg writes that the first step in the inversion of the U.S. Treasury curve may occur as soon as next week as the spread between seven- and 10-year yields held below 4 basis points on Tuesday. A negative slope of the yield curve has historically been a precursor of recessions. Former U.S. Treasury Secretary Lawrence Summers warned this week that developed countries are poorly prepared for another recessions and that central banks should be wary of rising interest rates to stop inflation from running too high.

·         Housing affordability has dropped to the lowest since 2008 this quarter, according to data from the National Association of Realtors. Average wage earners would need to spend 31.2 percent of income to buy a median-priced home this quarter, which is above the historic average of 29.6 percent of income. Ben Steverman of Bloomberg writes that millennials are far behind the savings levels of the previous generation when at the same age due to student debt and stagnant wages. Steverman says that millennials can only contribute the bare minimum to retirement plans and struggle to find affordable homes within commuting distance of their jobs.

·         According to head of global exchange-traded funds at Franklin Templeton, Patrick O’Connor, fixed income indexes are broken. He says they are broken due to weighting of individual securities based on debt issued so that companies that issue more debt will have a higher weight in an index-based ETF. These same arguments apply to the gold stock ETFs that only base their index inclusion criteria on market capitalization and liquidity, with no view toward the financial quality of the companies or management’s skill that are being bought for the funds.

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