Palladium Is Now The Most Valuable Precious Metal

Strengths

• The best performing metal this week was palladium, up 4.36 percent on acute supply tightness. JPMorgan sees additional upside to the price despite weaker auto sales. Gold traders and analysts surveyed by Bloomberg remain bullish on the yellow metal for a 10th straight week even as prices remain near the $1,300 level. ETFs added gold to their holdings for the 15th straight day. So far this year, according to Bloomberg data, ETF net purchases totaled 917,554 ounces. Turkey continues to stock up on gold with its reserves rising $123 million from the previous week. Russia is also boosting its reserves of gold. Central bank data shows that Russia’s gold reserves rose to $468.5 billion in December, up from $462.1 billion in November. This week’s further Brexit turmoil has sparked gold demand in the U.K. as a safe haven asset.

• Bloomberg reports that Waterton Global Resource Management, which owns 12 percent of Hudbay Minerals, is seeking to oust Hudbay’s CEO and most of the board. The company’s shares have fallen more than 40 percent in the past year and Waterton began agitating for changes since last year. Waterton CEO Isser Elishis said that “the company’s board must evolve in order to meaningfully hold management to account.” Shareholder activism such as this is positive for the metals sector and could help spark better performance from companies.

• Just three months after Barrick Gold moved to buy Randgold Resources, another mega gold miner deal was announced this week. Newmont Mining is buying rival Goldcorp in a $10 billion deal that will create the world’s largest gold miner. Newmont will pay 0.3280 of its own shares for each Goldcorp share, representing a premium of 17 percent, reports Bloomberg. Goldcorp shares climbed 11 percent on Monday when the deal was announced.

Weaknesses

·         The worst performing metal this week was silver, down 1.63 percent. Gold is experiencing its slowest start to a year in six years, trading within the narrow range of $1,280 to $1,300 an ounce, despite January historically being a strong month for the yellow metal. South Africa, once the world’s top producer, has seen gold production fall since September 2017 and is down 14 percent from a year earlier. Bloomberg’s Prinesha Naidoo writes that most of South Africa’s gold mines are unprofitable at current gold prices.

·         Kirk Woodman, vice president of exploration at Vancouver-based Progress Minerals, was found dead with bullet holes in his body in Burkina Faso yesterday after being reported as abducted earlier in the week. Officials of the West African nation have said that no group has taken responsibility for the murder so far.

·         As mentioned above, the Newmont-Goldcorp merger is likely positive for the gold industry, and is even more positive for Goldcorp CEO David Garofalo, who could exit the deal with $6.9 million to $11 million in his pocket. Garofalo has overseen shares of Goldcorp fall more than a quarter in the last 12 months and highlights the fact that some gold executives are overpaid even as the companies they run underperform. The Shareholders’ Gold Council said in a statement that “the merger with Newmont is only a victory for shareholders in as much as it eliminates another gold company with executive incentives that are grossly misaligned with those of shareholders.”

Opportunities

·         Billionaire and founder of Equity Group Investments Sam Zell said in a Bloomberg interview this week that he has bought gold for the first time in his life “because it is a good hedge.” Zell continued to say that “supply is shrinking and that is going to have a positive impact on the price.” Another bullish recommendation on gold this week comes from Cornerstone Marco. The investment shop writes that gold could be set up for a breakout above the well-defined annual tops of the last five years. Analysts write that gold is a bona fide investment vehicle because it has “matched the performance of the S&P 500 with dividends reinvested over a 20-year basis” and that gold’s performance is “not too shabby.”

·         Jewelers in China, the world’s number one consumer of gold, are struggling to appeal to the younger generation of consumers because they don’t view gold jewelry as an investment, as some of the older generations did. However, to combat these changes, jewelers are opting for more unique designs rather than focusing solely on quality. For example, new gold jewelry player Mene is partnering with world-renowned fashion photographers Inez & Vinoodh to create a special collection of investment-grade jewelry. Some older, more traditional jewelers who have not kept up with changing trends could see shares fall on weaker sales. For example, Signet Jewelers fell 25 percent on Thursday and was downgraded to a sell from neutral after the company reduced financial targets on disappointing holiday results, reports Bloomberg.

·         With now two monster gold miner deals—Barrick-Randgold and Newmont-Goldcorp—there could be more smaller acquisitions on the way. Newmont and Goldcorp are both expected to unload some of their unloved assets, which could leave room for other gold companies to make some deals. UBS Group AG analysts, including Daniel Morgan, write that Australian gold producers, such as Evolution Mining and Northern Star Resources, are best placed to acquire assets that could be sold amid the two above-mentioned mergers. Northern Star Resources executive chairman Bill Beament said in an interview this week that deals won’t come cheap. Beament says that the gold sector isn’t under pressure and that “the majors aren’t forced sellers.” Some warn that mega-mergers aren’t necessarily positive for shareholders. Jake Klein, executive chairman of Evolution Mining, told Bloomberg that the thesis of bigger being better “hasn’t proven to be value creating for shareholders” historically in the gold sector. Mid-sized and small producers such as Evolution Mining and Wesdome Gold Mines have actually outperformed larger competitors over the past six years.

Threats

·         The Financial Times reported that there was large-scale fraud in elections in the Democratic Republic of Congo. This could be negative for certain companies who own mines in the country. Due to the recent mega gold miner mergers, the S&P TSX Global Gold Index will now become a combined 38.8 percent weighted in just two names, Barrick and Newmont, which makes the index and portfolios tracking the index less diversified. Some investors worry that Canada is losing its status and influence in the global mining industry, as evidenced by the takeovers of Canadian-based Barrick and then Goldcorp. For example, with the Newmont-Goldcorp merger, offices will more than likely be consolidated to Newmont’s in Colorado, removing Goldcorp’s Vancouver presence.

·         Russia is discovering that the push to accelerate “de-dollarization” is harder than it initially thought. Bloomberg writes that Russia’s central bank dumped $101 billion in 2018 of U.S. currency amid fears of additional sanctions. Shifting to another currency, such as the ruble or yuan, equals higher costs and difficulties in finding banks to handle business, according to Russian state-owned company executives. Many commodity benchmarks, such as oil, are set in the U.S. dollar, which makes it complicated to move away from.

·         Credit Suisse strategists warn investors not to get overly optimistic about the global stock market rally and warn that it’s best to take profit instead of building positions. Bloomberg writes that the strategists say investment-grade spreads, which have been closely correlated with the S&P 500, are at “danger” levels. Wells Fargo wrote this week that it would turn negative on gold if it breaks the $1,350 an ounce level. The bank warned investors to “resist the urge to jump on the gold bandwagon if this rally continues” because they view the gold rally as a sprint, rather than a marathon, and say it won’t last.

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