Gold Investors Weekly Review – May 16th

In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at $1,293.46, up $4.67  per ounce (0.36%). This was the gold investors review of past week.

Gold Market Strengths

U.S. inflation has undoubtedly picked up, and is likely to rise toward the Federal Reserve’s target. A number of important inflation readings outpaced the official U.S. Consumer Price Index (CPI) this week: (1) services inflation rose 2.5 percent; (2) food prices have risen more than 10 percent year to date; and (3) core import prices are rising, thus abating the deflationary impact they had over the past two years. In addition, Treasury Inflation-Protected Securities (TIPS) have been rising since the beginning of the year, and really spiked this month, in anticipation of higher inflation. This recent move lower in real yields has not yet been transmitted into higher gold prices.

inflation_expectations_vs_gold_price_2012_2014

inflation expectations vs gold price

Palladium climbed to the highest price since August 2011, and 15 percent year to date, as concerns mounts over supply restrictions in South Africa. Meanwhile, the Russian government has moved to purchase palladium from local producers, with markets speculating the country’s Gokhran palladium stockpiles are near exhaustion. On a similar note, platinum demand is expected to increase 35 percent this year in India alone as local jewelers seek to replace the volumes lost when gold import curbs took effect.

Gold Market Weaknesses

Chinese gold and silver jewelry sales fell 30 percent in April, according to the National Bureau of Statistics. However, as Macquarie analysts pointed out, the year-over-year comparison is misleading due to the fact that April 2013 was an exceptional month for gold jewelry sales as gold prices dropped over $100 per ounce.

Gold Market Opportunities

A Bloomberg report shows China is on pace to import two-thirds of non-Chinese mined gold production as demand rises 31 percent. China is expected to import more than 1.45 million kilograms this year, while gold supply is not expected to change materially in 2014 from 2.3 million kilograms in 2013. Going forward, China’s dependence on foreign gold is likely to increase given that gold reserves in China are made up of small- to medium-sized deposits of low-grade ore.

Barclays’ North America precious metals analysts are optimistic on the gold space following the earnings’ wrap-up this week. According to Barclays, the large number of earnings’ beats, together with reiterated or raised guidance, show that the pendulum “swung too far.” In general terms, there was broad outperformance industry-wide in the first quarter, possibly marking the beginning of a new cycle of rising expectations. Companies like Agnico Eagle Mines, Mandalay Resources, and OceanaGold showed the investing community that there is plenty of value in gold stocks, even after the drop in gold prices.

Gold Market Threats

ISI’s Weekly Economic Report suggests that its Diffusion Index of company surveys, which has been used as a leading indicator, has peaked in a way that resembles the “Sell in May’ peaks of the previous three years. As such, the Fed minutes for the April Federal Open Market Committee (FOMC) meeting to be released next Wednesday are likely to be the next catalyst for stocks and gold. Further to that, Friday’s new home sales report is of special importance given the sharp decline seen in March, which analysts are forecasting to be corrected by the April reading.

BofAML is of the opinion that the Chinese government’s focus on quality over quantity of growth is likely to result in short- and medium-term weakness by allowing selective defaults. Next week’s China HSBC Flash Manufacturing PMI will be an important indicator for gold. The PMI’s three-month average is sitting at 48.2, while analysts’ expectations call for a 48.3 reading. Any reading above this is likely to be perceived as contributing to the stabilization of the Chinese economy and should be bullish for gold as it indicates expectations of rising future incomes.

India has announced it raised its benchmark import price for a number of commodities in an effort to stave off the appreciation of the Indian Rupee following the primary elections. The price benchmarks for gold and silver will be raised, which will result in small hikes to import tax bills.

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