Gold Bulls Regained The Upper Hand

Strengths

• The best performing precious metal this week was gold, down 0.65 percent. Gold bulls regained the upper hand this week in the Bloomberg survey of traders and analysts, as investors weigh U.S.-China trade tensions and the outlook for global growth. Bloomberg reports that open interest, a tally of outstanding futures contracts in bullion, surged the most since mid-2016 on Monday to the highest in seven weeks.
• Turkey’s gold reserves rose $246 million from the prior week to now be worth $20.7 billion, according to figures from the nation’s central bank in Ankara. Intercontinental Exchange Inc.’s plan to slow down lightning-fast traders in the futures market has the approval from the U.S. Commodity Futures Trading Commission, reports Bloomberg’s Ben Bain. The exchange’s plans to impose a 3-millisecond trading delay on gold and silver contracts, and would be the first-ever “speed bump” for futures trading.
• Bloomberg reports that China’s holdings of U.S. Treasury securities dropped in March for the first time in four months amid the trade dispute. China’s holdings of notes, bills and bonds declined by $10.4 billion from the prior month to total $1.12 trillion, according to Treasury Department data.

Weaknesses

• The worst performing precious metal this week was platinum, down 5.30 percent as hedge funds cut their bullish position to a six-week low. Better-than-expected U.S. economic data boosted the dollar, taking gold down for the week despite the ongoing trade concerns. Bloomberg reports that after reaching a one-month high on Tuesday, gold has failed to hold those gains on a strong dollar. U.S. home starts rose while jobless claims fell.
• Commodity ETFs saw seven straight weeks of outflows, led by precious metals funds, which had $429 million of losses. Silver is at its cheapest relative to gold in more than 25 years, however that doesn’t necessarily mean it’s ready for a rebound. According to Ole Hansen, head of commodity strategy at Saxo Bank A/S, gold’s premium over silver – “the forgotten metal” – will keep increasing as long as traders focus on safe-haven and growth worries. Silver has industrial and jewelry uses, making it more exposed to economic and trade jitters.
• Zimbabwe’s largest gold producer, Metallon Corp., is suing the country’s central bank for $132 million because it has been paying for gold in local currency, rather than U.S. dollars. Zimbabwe abandoned its local dollar in 2009 after hyperinflation, and then adopted the U.S. dollar. However, it’s since introduced a quasi-currency that can only be used within the nation and the business sector is not happy.

Opportunities

• A rate cut is already being priced in as a near certainty. Bloomberg’s Emily Barrett writes that traders of Fed funds are currently positioning for a rate cut of just over 25 basis points this year and that the inflation market suggests the Fed should slash rates, rather than just trimming them. Something that stayed out of headlines this week: yields on 3-month Treasuries are again higher than those on 10-year notes. The inversion picked up a week ago when President Trump announced an increase in tariffs on Chinese goods. Gold regained some of its appeal this week on safe haven demand after three straight monthly declines.

• Tavi Costa, a global macro analyst at Crescat Capital LLC – one of last year’s best performing hedge funds – expects China’s debt woes to spur a rally in gold, reports Bloomberg. 2019 is shaping up to be the biggest so far for defaults in its $13 trillion bond market. In a telephone interview, Costa says that “the one pattern we found is that gold in local currency terms tends to rise significantly as a credit bust develops.” Costa calls its bullish bet on gold the “trade of the century.”
• This was a busy week for M&A activity and speculation. Australian gold producer St Barbara Ltd. agreed to acquire Vancouver-based Atlantic Gold Corp for C$722 million. Alexandria Minerals will be acquired by Osisko Mining Inc. in combination with Chantrell Ventures Corp and will be renamed O3 Mining. Bloomberg reports that Canadian miner Iamgold Corp. is exploring a possible sale of all or part of the company. BMO analyst Brian Quast writes that New Gold, Pretium Resources, TMAC Resources and Wesdome are potential targets for Australian miners looking to expand into Canada through acquisitions.

Threats

• According to a monthly poll of consumers, expected inflation three years ahead dropped to 2.7 percent in April, which is the lowest reading since August 2017. A similar University of Michigan survey measure of expected inflation in five to 10 years also fell in April to a half-century low. These polls, however, were conducted before President Trump raised tariffs to 25 percent from 10 percent on $200 billion worth of Chinese imports. This is a noticeable difference in sentiment, as Goldman Sachs says the trade war escalation will actually noticeably drive inflation above 2 percent next year, saying the cost of tariffs has fallen entirely on U.S. businesses and consumers.
• According to Greg Longstreet, CEO of Del Monte Foods Inc., the U.S. is in an inflationary environment right now, with tariffs driving up prices on his company’s canned fruits and vegetables as much as 25 percent, according to Bloomberg. Walmart Inc. announced this week that shoppers will absorb some of the costs from the tariffs and will likely set the tone for other retailers as they decided whether or not to pass along additional costs to consumers or absorb them.

The U.S.-China trade war continues to worsen. On Friday morning, China’s state media signaled a lack of interest in resuming the trade talks under the current threat of higher tariffs, writes Bloomberg. Also adding fuel to the fire is the Trump administration placed restrictions on Huawei, China’s top technology company.