Central Banks Continue Gobbling Up Gold

SWOT Analysis: Central Banks Continue Gobbling Up Gold

Monday February 22, 2016 14:05

Strengths

• The best performing precious metal for the week was gold, up 5.46 percent.  This follows 54 tonnes of gold ETF purchases in January.  Central banks in the fourth quarter increased their demand for gold by 25 percent, according to the World Gold Council, as a haven from oil's slump and concerns about a stumbling economy, as seen in the chart below.

• The Economist calls gold's surge past $1,200 an ounce this week a "hedge against ignorance," pointing to question marks hanging over the global economy, some of which include China's economy, falling oil prices and the fragility of global banks. Even as gold prices fell on Friday, the metal headed for its biggest weekly jump since 2011, reports Bloomberg.
• Tahoe Resources announced its definitive agreement this week to acquire Lake Shore Gold. TD Securities reports that the offer represents a 14.8 percent premium to the closing price of Lake Shore shares on Friday and a 25.7 percent premium to the 20-day volume weighted average price (VWAP) for the period ending Friday.

Weaknesses

• The worst performing precious metal was palladium, still up 4.26 percent for the week.  Palladium is likely being pulled up with spreading interest in precious metals to hedge general market risk.
• It seems that even gold bulls failed to imagine just how much the precious metal could soar this year, reports Bloomberg, adding that gold prices have surged past three-quarters of the peak forecasts in a mid-January survey by the London Bullion Market Association. In another article entitled "Gold's Monkey Magic Seen Fading after Biggest Advance Since 1980," Bloomberg reports that 12 analysts surveyed believe gold will drop this month as Chinese consumers slow purchases that surged before the start of the Lunar New Year. Prices could drop to $1,100 an ounce from Monday's $1,200 high, say seven additional analysts providing forecasts.
• After the market close on Wednesday Franco-Nevada announced a $500 million "bought deal" to fund the acquisition of future production from a mine owned by Glencore and the book was filled that evening with prospective investors wearing the overnight risks until allocations were to be announced at 7:30 a.m. before market open.  Unfortunately, gold prices jumped $50 on Thursday and demand surged for the offering since all the late comers to the party wanted a crack at getting some free money since the price of the offering had been fixed the prior day.

Opportunities

• Gold climbed to the highest in a year as investors reacted to Janet Yellen's suggestion that the central bank may delay raising interest rates, reports Bloomberg. Investors poured money into the precious metals markets this week, with $1.6 billion of total money tracked by Bank of America Merrill Lynch buying up gold and other precious metals including silver and platinum. To emphasize the fears wracking markets, Business Insider reports that the biggest outflows last week were seen from three risky asset areas: $6.8 billion from equities, $2.5 billion from high-yield bonds and $1.1 billion from emerging-market government debt.  This could just be the first wave of money beginning to buy gold.
• There seems to be a correlation between the UK's net gold export and China's wholesale gold demand, implying gold imports by China are supplied by London, reports Goldseek. In December 2015, the UK gross exported 213 tonnes of gold, the second-highest number on record. In addition, Raymond James reports this week that gold valuations have room to run. The group says that prior to gold's recent bear run they often looked at the gold price to gold stock ratio, with the ratio touching an all-time high of 28X this past January. They continue by noting that a more normal paradigm could range from 16X to 13X, still far below today's valuations.  Circling back to the news of Tahoe Resources' bid to buy Lake Shore Gold, we expect there to be more acquisitions of Canadian and Nevada based assets as it is still likely cheaper to still buy assets in or near production in these prime locations.
• The CIO of JPMorgan, Robert Michele, believes that this week's precious metals flight shows retail investors have more confidence in gold than in paper money. Jeffrey Gundlach, founder of DoubleLine Capital, added to this belief by Tweeting that investors are losing faith in central banks and gold could hit $1,400 an ounce.

Threats

• Sweden's central bank shook markets this week with a rate cut of 0.15 percent, now at -0.50 percent. Bank shares plunged in reaction to the cut, with Societe Generale down 13 percent, Deutsche Bank down 7 percent and Santander down 6 percent.
• There are "no limits" to how far central banks can ease monetary policy, reports Bloomberg, stating that this is a recent declaration of both the ECB President Mario Draghi as well as Bank of Japan Governor Haruhiko Juroda.  These leaders have joined their counterparts in Denmark, Sweden and Switzerland to embrace interest rates of less than zero.  JP Morgan's economist reported in a recent study that the ECB could cut rates to -4.5 percent and the Fed to -1.3 percent.  They strongly cautioned investors that there appears to be a lot of room for central banks to probe how low rates can go stating, "We believe it would be a mistake to underestimate their capacity to act and innovate."
• Goldman Sachs predicts losses over the coming year for gold, despite the precious metal's rally this week, citing the Fed's interest rate increases over no fewer than three times. The group forecasts that bullion will be at $1,100 in three months, reports Bloomberg. Supporting Goldman's view, gold's relative-strength index, an indicator that tracks momentum, has climbed over 70, reports Bloomberg. This indicates to some analysts that prices will fall.

Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Source: http://www.kitco.com/commentaries/2016-02-16/SWOT-Analysis-Central-Banks-Continue-Gobbling-Up-Gold.html

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