Gold Investors Weekly Review – May 9th

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 $1,289.10, down $10.52  per ounce (0.81%). This was the gold investors review of past week.

Gold Market Strengths

Global open interest for palladium is up 401 thousand ounces year to date, or 18.4 percent, leading to a spike in palladium ETF holdings to an all-time high. This is particularly significant, since the market is set to record a major deficit this year, which has sent prices up 16 percent from the lows in early February to new 32-month highs above $800 per ounce. In addition, Impala Platinum announced it may reduce its PGM supply by 60 percent over the next three months as it remains unclear how long the platinum strike might last.

Palladium-ETF-Holdings-May-2014

Palladium ETF holdings between May 2013 and April 2014

The People’s Bank of China has approved the bourse to set up an international board in the Shanghai free-trade zone, thus allowing foreign institutions and individuals to trade gold on the exchange. The measure is expected to make it easier to bring gold into the country, where strong physical demand remains robust, as evidenced by gold consumption in China increasing slightly from last year. However, jewelry purchases rose 30.2 percent over the same period, highlighting the importance of what we call the “love trade,” which represents nearly 80 percent of all Chinese demand for gold.

Gold Market Weaknesses

Gold prices slid this week as signs of an improving global economy reduced the appeal of haven assets, according to a Bloomberg report. The U.S. trade deficit narrowed in March, with exports growing the most in nine months, while the Purchasers Managers’ Index for the eurozone climbed to 53.1 in April from 52.2 the previous month.

UBS recommends selling gold on any price rallies, arguing bullion lacks the incentives to push higher, and more importantly, to maintain its “elevated perch.” The bank’s analysts added that recent gains were aided by “nervous shorts.” Similarly, Goldman Sachs argues gold’s recent gains are a result of transient factors, implying prices are expected to grind down from here.

Dick Poon, general manager at Heraeus Metals in Hong Kong, expects China’s gold demand to be muted in the coming months, thus keeping prices at current levels. In Poon’s view, 2013 was an exceptional year, evidenced by large physical delivery premiums, which have subsided in 2014. Poon argues the level of buying last year will not be repeated as consumers bought forward in 2013 after the price drop.

Gold Market Opportunities

Kevin Kerr, editor of CommodityConfidential.com, is of the opinion that a downside in gold bullion is very limited, and not taking a long position at this stage is “somewhat foolish.” It would appear that Dundee Capital Markets’ chief economist Martin Murenbeeld agrees. According to Murenbeeld, one of the more prescient gold forecasters, gold is likely to end 2014 at $1,367 per ounce, before climbing to $1,438 in 2015.

The downturn in gold exploration will hit future gold production. Michael Chender of Chender’s Metals Economics Group, one of the foremost researchers into mineral exploration trends, has presented gold exploration statistics that are likely to impact gold supply going forward. According to Chender, not only have exploration expenditures declined 33 percent year-over-year, but exploration activity by juniors was hit harder as funding dried up. Overall, Chender expects exploration spending to drop an additional 20 percent this year, with most of the decline coming from cuts to grassroots exploration.

Gold Market Threats

Gold traders are the most bearish in seven weeks as we head into next week, with the majority of them citing the developments in Ukraine and the continued cuts in U.S. stimulus as reasons to hold or sell bullion. Similarly, speculators have argued mounting confidence in the U.S. economy as a reason to lighten their long gold bets.

The Office of the Inspector General announced it will commence a preliminary investigation to determine whether the U.S. Environmental Protection Agency (EPA) violated laws, regulations, policies and procedures in its assessment of mining impacts in Alaska. A pre-emptive veto by the EPA against the Bristol Bay Watershed has raised serious questions over its independence. Previous, numerous controversies have surrounded the EPA, especially those where green group lawsuits against the EPA have resulted in changes to regulations. This strategy has been criticized as a go-around process to circumvent the legislative process and enact regulations that would have otherwise failed in congress.

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