SWOT Analysis: Is Now the Best Entry Point for Gold Investors?

The best performing precious metal for the week was gold.  Gold was hammered down while Chinese markets were closed in the prior week, triggering a technical buy signal and possibly the best entry point in over a year to add to positions.
After gold price discounts hit a record high of $100 an ounce in July, prices in India swung to a premium for the first time in nine months this week, reports Reuters, around $2 an ounce. The Business Standard also reported this week that the sixth tranche of the sovereign gold bond scheme in India is set to launch on October 24, with bonds being offered at a discount to attract more customers.

It seems the relatively new Shanghai Gold Exchange (SGE) gold price benchmark has been leading the way in terms of setting the direction of the global gold price level, writes Lawrie Williams, following the recent $60 price drop of the metal during China’s Golden Week. Williams’ colleague Julian Phillips adds that the Shanghai physical market for gold is thought to better represent physical gold prices than COMEX paper market prices. In fact, the Dubai gold exchange has signed a contract to use the Shanghai Fixings in place of the London Fixings. In a related note from S&P Global this week, China’s central bank added 5 metric tons to its gold reserves in September, making total gold holdings now at 1,838 tons.
Weaknesses

The worst performing precious metal for the week was palladium, falling 3.66 percent.  Extending a selloff sparked by weak trade data from China, palladium fell to a three-month low, reports Bloomberg. Palladium prices have fallen nearly $100 over the last three weeks.

Hedge funds are cutting bullish bets on gold at the fastest pace this week, sending the yellow metal near four-month lows, reports Bloomberg. Money managers cut net-long wagers by 25 percent, according to U.S. Commodity Futures Trading Commission data released last week. In the past two reports, the article continues, the position has fallen by around 180,000 contracts. This drop could potentially be setting up a rebound for the metal. Similarly, the increased odds of a December rate hike are sending gold mining shares downward, following the biggest rally in a decade.

According to Bloomberg, China said its consumption of non-ferrous metals will expand through the year 2020 at less than half the pace seen in the first five years of the decade. The Ministry of Industry and Information Technology said the nation’s economy is “entering a new normal” in which demand growth for metals will slow to a medium-low pace from a high-speed one.

Opportunities

James Steel, respected chief precious metals analyst with HSBC, has written a note indicating that higher gold prices are likely to come out of the global trade slowdown, writes Zero Hedge. “Demand for gold is often stimulated by the same factors that fan protectionist and populist sentiment,” Steel said. “Abrupt declines in cross border trade, investment and immigration, the dislocation of global economic policies, and a beggar-thy-neighbor approach to trade, is almost tailor-made for higher gold prices.”

A survey of attendees at this year’s London Bullion Market Association in Singapore show that gold is set to rise around 7 percent by the time of the 2017 conference. General manager at Heraeus Metals in Hong Kong, Dick Poon, says gold can surge to $1,400 in 2017 as the Fed holds back from further monetary tightening in at least the first half after an increase in December, reports Bloomberg. Portfolio manager Terence Kooyker at Blenheim says he is bullish on gold too, and bearish on oil. Kooyker says faster U.S. inflation and low interest rates will support gold, adding that “gold always performs best when nobody thinks you should own it.”

In a note this week, Macquarie Research initiated coverage of Rye Patch Gold with an outperform recommendation. The group writes that Rye Patch is transforming from an explorer royalty company to a junior producer on the back of its July 2016 acquisition of the Florida Canyon mine (FCM) in Nevada. Macquarie sees FCM offering investors a key opportunity for high returns, given that the stock is trading around 70 percent discount to junior producer peers.
Threats
Earlier this year, it was reported that California’s Public Employees’ Retirement System (Calpers), the largest in the U.S., earned only 0.6 percent on its investments last fiscal year, reports Financial Sense. In order to meet its long-term goal, however, the pension needs to be returning over 12 times that amount. Calpers’ Chief Investment Officer Ted Eliopoulus writes that it is a significant policy issue and the system must average at least 7.5 percent a year to match its assumed rate of return or turn to taxpayers to make up the difference.

To add to the point above, author of California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, Lawrence McQuillan writes that the total unfunded liability in California alone is $950 billion all-in when looking at state and local pension plans. Again, that is just California. This is a huge “ticking time bomb,” he continues, noting that if you look nationally and use realistic numbers, it’s around $4 trillion when looking at all state and local government pension plans across the country.  Investors should always think in terms of portfolio diversification as pension funds may not hold any gold exposure.

The world’s biggest central banks are bulking up their balance sheets, reports Bloomberg. The combined assets of the 10 largest central banks now total $21.4 trillion, a 10-percent increase from the end of last year. “The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market,” the article continues.  Almost 75 percent of the world’s central bank assets are controlled by just four policymakers in China, the U.S., Japan and the eurozone.

Frank Holmes
10/24/2016