Is A Sharp Gold-Price Recovery On The Horizon?

Strengths

·         Spot gold was the best performing precious metal for the week. Gold is putting up a fight against the U.S. dollar, according to Ole Hansen, head of commodity strategy at Saxo Bank. The yellow metal is showing resistance near $1,200 an ounce, which suggests that prices are, for now, finding a floor, reports Bloomberg. Midweek gold rose for a second day from the lowest in more than 16 months. Investors are weighing the escalation of trade wars along with the U.S. stating it will impose 25 percent duties on an additional $16 billion in Chinese imports in two weeks (in addition to investors assessing U.S. sanctions on Russia).

·         Indian gold imports are said to have increased in July, reports Bloomberg, after declining every month in the first half of 2018. Imports expanded 21 percent to 65.6 metric tons from a year earlier, as jewelers prepare for a “revival in demand during the festival season that starts in about three weeks.”

·         The European Parliament has agreed to ease liquidity rules for banks trading gold, reports CNBC, marking a success for the London Bullion Market Association’s (LBMA) campaign to revise the plans. As part of regulations known as Basel III, the proposed rules should come into effect in the European Union around the year 2020. “The proposals treat physically traded gold like any other commodity, meaning banks would have to hold more cash as a proportion of their gold exposures as a buffer against adverse price moves,” the article reads. On another note, Russia’s Finance Ministry said in a statement that gold output in the first half of the year was little changed at 122.5 metric tons year-over-year, Bloomberg reports.

Weaknesses

·         Silver was the worst performing precious metal for the week, with a loss of 0.56 percent as hedge funds boosted their bearish view to a 12-week high. As of Friday, exchange-traded funds (ETFs) cut 6,184 troy ounces of gold from their holdings, making this the seventh straight day of declines, according to Bloomberg. In addition, commodity-focused ETFs saw withdrawals over the last week, with those investing in precious metals leading the decline. Data compiled by Bloomberg shows that outflows from U.S.-listed commodity ETFs totaled $538 million in the week ended August 9. This compares to withdrawals of $280 million in the previous period. A silver lining to this news is seen in the VanEck Vectors Gold Miners fund, which added $102.2 million in the latest session. This increases the fund’s assets by 1.2 percent to $8.83 billion. “This was the 17th straight day of inflows, totaling $944.1 million,” Bloomberg writes.

·         Pandora, the world’s biggest jewelry maker, plunged this week after cutting its profit and sales forecasts, Bloomberg reports. The company has seen pressure in key markets such as the U.S. and China. Shares fell more than 20 percent, the most in seven years. Just three months ago, investors saw the same slump when the company’s first-quarter report disappointed, the article continues.

·         New Gold’s technical report for the Rainy River mine resulted in even lower valuation, writes Bloomberg. This raises the potential for further impairment charges, Eight Capital said. In addition to this news, New Gold’s stock got two downgrades.

Opportunities

·         According to ICBC Standard Bank, gold’s plunge to the lowest level in more than a year is close to ending, and the price of the yellow metal has the potential to climb back to $1,300 by December. London-based commodities strategist Marcus Garvey said, “We are going to see almost certainly two U.S. interest rate hikes come this year, but they are already, if not fully priced, fairly nearly. So there isn’t a huge scope for a surprise here.” Another comment on gold’s next move comes from ANZ strategists Daniel Hynes and Soni Kumari. The two wrote in a report on August 7 that the possibility of a short-covering rally in the coming months is seen on expectations of U.S. dollar depreciation amid rising inflation, economic growth peaking and increasing geopolitical uncertainty. On a related note, London-based Bullion Vault reported that the number of those buying gold through the company has exceeded the number of sellers by more than four to one in July, making it the widest margin since 2008. Lastly, Northern Star Resources CEO Stuart Tonkin told Bloomberg TV that the gold price has bottomed as output peaks.

·         A strong stock market has been causing gold some pain, reports Bloomberg, as the metal falls toward $1,200 an ounce, a level not seen since March of last year. As you can see in the chart below, this slump has put gold bullion near the lowest relative to the S&P 500 Index futures since the global financial crisis. “Investors are abandoning the non-interest-bearing commodity for riskier assets amid higher U.S. rates and a solid global economy,” the article continues. Mike McGlone, BI Commodity Strategist, adds that good support and extremely short net positions is a recipe for a sharp gold-price recovery. 

·         The U.S. midterm elections could play a big part in shaping the outlook for gold, reports Bloomberg. As Richard Hayes, CEO of Australia’s Perth Mint, points out, demand for coins and minted bars was a bit sluggish over the past year as President Donald Trump’s earlier win in the presidential poll prompted investors to divert funds into stocks, bonds and property. “If the Democrats do particularly well, that will spark a renewed sense of demand in the States for both gold and silver and that will then flow over into Europe and the rest of the world,” Hayes continued.

Threats

·         According to one Bloomberg headline, gold may lose a third of its value by the end of next year. The yellow metal is moving inversely to U.S. two-year yields with a 30-day correlation of 0.87. This could mean losses ahead as short-term Treasury yields rise. As MLIV discussed previously, and as Bloomberg notes, those yields are poised to push higher based on the expected Fed funds rate peak, likely something close to 3.5 percent. Rates were this high back in 2007, and gold traded at $802 an ounce. Wes Goodman points out another headwind for gold: the fact that holders of bullion-backed ETFs are sitting on about 150 tons of loss-making metal. This is nearly 5 percent of annual global mine supply, so if all that metal comes back to the market, it could prove a big swing factor, Goodman reasons.

·         A liquidity crunch is the new worry for credit investors. “It’s not trade wars or an equity market correction that look to be keeping credit investors up at night,” Bank of America strategists wrote in a note this week. “The concern is a more pervasive rush for the exit at some point in the future.” An otherwise healthy economic backdrop is being overshadowed by extreme moves that are haunting cross-asset investors, Bloomberg reports, with illiquidity fears rising across the board. “It’s especially a concern in high-yield credit, where investors holding cash bonds can face steep penalties if they rush for the exit,” the article reads.

·         A trade war between the world’s two biggest economies continues to escalate as the U.S. said it will begin imposing 25 percent duties on an additional $16 billion in Chinese imports in just two weeks, reports Bloomberg. Items on the new list range from motorcycles to steam turbines to railway cars. Even though American companies have complained that such moves will raise business costs and eventually consumer costs, this will be the second time the U.S. places duties on Chinese goods in about the past month, the article continues.

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