Gold Stocks At Their Most Discounted Values In 20 Years

Strengths

·         The best performing metal this week was silver, up 2.89 percent as traders loaded up on almost 10 million ounces in a span of one minute on Friday. Gold traders and analysts are bullish on the yellow metal for a sixth straight week, as measured by Bloomberg’s weekly survey, even as gold heads for its sixth month of losses.

·         Jewelry stocks in India performed well this week after unexpected news that import duties will not be raised on gold. Sandeep Kulhalli, vice president at Titan, a jewelry company, said that “by keeping the duties at the same level, the customer sentiment toward gold buying will be positive during the festive season.” As gold prices fall to six-week lows, physical demand saw an uptick in China, the world’s largest consumer of the precious metal. Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong, told Reuters that “cheaper gold prices led to increased buying in both Hong Kong and China. Shanghai premiums increased on Friday, reflecting higher demand.”

·         Inflation in Germany unexpectedly rose to a four-month high, suggesting that the interest rate in the eurozone will rise further above the European Central Bank’s target, reports Bloomberg. Consumer prices rose to 2.2 percent this month, exceeding the 1.9 percent level in August, driven by rising energy costs. U.S. inflation also continues to rise. The Federal Reserve Bank of New York notes that the gauge detects cyclical turning points in underlying inflation and has a better track record than the consumer price series. As of June 30, the gauge was at 3.33 percent, above the current generic 10-year Treasury yield of 3.06 percent.

Weaknesses

·         The worst performing metal this week was platinum, down 1.32 percent as HSBC forecast an ongoing surplus for the metal. Gold fell below $1,190 on Thursday, continuing its sixth straight month of losses. According to Bloomberg, the U.S. dollar strengthened this week, causing gold futures to fall to their lowest level in six weeks, after a rise in U.S. durable goods orders. Should this trend carry on, the yellow metal will hit its longest losing streak in 30 years.

·         Sibanye Gold’s two largest unions are on strike over pay after prior wage talks in July failed to reach an agreement. Thousands of South African job cuts have resulted in the lowest number of mining-industry jobs since 2009, creating a highly charged atmosphere for these negotiations. The situation currently remains unresolved, while other unions came to agreements with South African mining companies last week.

·         Continental Gold lost three employees at its Berlin Project in Colombia following an attack by former members of the Revolutionary Armed Forces of Colombia (FARC). In addition to the geologists who were fatally wounded, several other workers were injured. West African gold miners were similarly impacted after a roadside bomb killed eight soldiers in Burkina Faso. These attacks highlight the potential dangers miners and companies face by operating in regions with a prevalence of violence.

Opportunities

·         Barron’s Andrew Bary writes this week that the out-of-favored gold now deserves a place in investment portfolios. Compared with stocks and other financial assets, gold appears to be inexpensive and gold stocks are at their most discounted level in over 20 years relatively. Keith Trauner, co-portfolio manager of the GoodHaven mutual fund, says that “virtually every government in the world is trying to promote inflation partly because there is so much sovereign debt” and with so much debt governments have only three choices: default, restructure or inflate the currency. Trauner notes that most governments will choose inflation, which has historically been positive for the price of gold. Central banks have purchased a total of 264 metric tons of gold so far this year to reach the highest level in six years.

·         Several mergers and acquisitions have been announced this week in the mining space. Bonterra Resources has completed its acquisition of Metanor Resources solidifying a strategic step in acquiring the only permitted mill in the Urban-Barry gold camp. Kirkland Lake Gold announced that as a result of the above acquisition, they now own a 9.44 percent interest in Bonterra. Great Panther Silver has entered into a scheme implementation deed with Beadell Resources, which will acquire a 100 percent stake in Beadell’s Tucano gold mine in Brazil. The mine is expected to produce around 130,000 ounces of gold in 2018. Gold giants Barrick Gold Corp and Randgold Resources announced their merger, which will create the world’s largest gold mining company. Mark Bristow is set to become the CEO of newly combined company. Barrick also entered into a $300 million mutual investment agreement with Shandong Gold, China’s largest producer, which will further strengthen the relationship between the two miners.

·         At the Precious Metals Summit in Colorado last week, RBC’s panel of global research and sales, announced their top stock picks for the year. Those names include Tristar Gold, Regulus Resources, Sunshine Silver, Dolly Varden, Oklo Resources, Maverix Metals and GT Gold. The event was attended by a large number of corporate development teams, especially more senior miners who are on the hunt for new assets to add to their portfolio.

Threats

·         Although many central banks are gobbling up gold, Turkey continues to sell its gold. The Central Bank of Turkey saw gold reserves fall 16.1 percent, or 83.5 tons, from August to September. Then, reserves fell $821 million from last week to this week. Turkey’s economy continues to experience turbulence as the lira has plummeted so far this year.

·         10-year Treasury yields turned negative for European buyers this week due to mounting costs to convert payments from euros into dollars. Bloomberg writes that the three-month cross-currency basis dropped to minus 40 basis points overnight, from about minus 16 points on Wednesday, marking the biggest single-day decline since 2009. A similar change happened for Japanese-based investors. Three-month yen cross-currency basis swaps fell to minus 54 basis points on Thursday, and as a result, 10-year Treasuries now yield minus 0.08 percent for hedged Japanese buyers. This could result in fewer buyers of U.S. debt. Stan Druckenmiller, billionaire investor, joins a growing list of investors who have predicted that our massive debts will trigger the next financial crisis.

·         Marko Kolanovic of JPMorgan Chase & Co. says that a backlash could be brewing again the U.S. dollar as other countries look to weaken the dollar’s hold over the global financial system. In speaking with Bloomberg, Kolanovic says that “with the current U.S. administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, the question arises whether the rest of the world should diversify away from the risks of the U.S. dollar and dollar-centric finance.” The International Monetary Fund released its quarterly report on Friday showing that the dollar’s share of global reserves has fallen for the sixth straight quarter to the lowest since 2013. Gold tends to benefit from a weaker dollar and appears to be cheap, according to JPMorgan. Global trade is continuing to lose some steam amid the tariff battle between the U.S. and China, according to Bloomberg. Freight and logistics company DHL said that its trade indicator fell this month to the lowest level since 2016 and indicated a slower pace of growth in the coming months.

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