Gold Investors Weekly Review – January 16th

In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,278.85 up $56.33 per ounce (+4.61%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, gained 6.93%. The U.S. Trade-Weighted Dollar Index rose 0.77% for the week.

Gold Market Strengths

The Swiss National Bank’s surprise move to abandon the franc’s cap against the euro currency sent investors flocking to gold as a safe haven from currency swings. The SPDR Gold Shares ETF, the largest of the physically-backed ETFs, saw an inflow of almost 10 tonnes on Thursday, the largest single-day inflow since August 2012.

Gold traders are bullish for the seventh week in a row, citing the potential for stimulus in Europe along with speculation that the Federal Reserve will move slowly on raising rates. Moreover, one trader made a huge bullish bet earlier in the week by purchasing 40,000 March 2015 SPDR Gold Shares ETF calls worth upwards of $10 million.

The World Gold Council signed a memorandum of understanding with the Shanghai Gold Exchange on a comprehensive strategic gold cooperation agreement. This further marks the shift in the gold market from West to East, as the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency. The agreement underpins the development of gold investment products within the Shanghai Free Trade Zone and the international trading of gold in the Chinese renminbi currency.

Gold Market Weaknesses

Goldcorp announced it will take an impairment charge of up to $2.7 billion on its new Cerro Negro mine in Argentina. The company said this resulted from restrictions on importing goods and services into the country, converting Argentine pesos into U.S. dollars and high inflation.

U.S. retail sales fell the most in nearly a year last month, fueling speculation of weakness in the economy.

Average hourly earnings for all U.S. employees fell in December by the most since comparable records began in 2006, showing signs of slack in the labor market.

Gold Market Opportunities

Sharps Pixley sees gold averaging $1,321 per ounce in 2015, citing the potential for investors to seek protection from currency debasement as well as a strong physical demand for the metal. Carter Worth of Sterne Agee said the New York gold futures drop in October-November was a “head fake,” since gold has been stabilizing as the U.S. dollar rallies.

Although the U.S. producer price index declined 0.3% percent month-over-month in December, the drop was almost entirely attributable to food and energy. Excluding these components, core producer prices actually rose 0.3 percent. This counters the deflationary pressures arguments.

US_PPI_Jan2015

The Swiss franc soared as much as 38 percent on the news of its euro-cap rate abandonment, a currency move that normally takes years to accomplish. The markets interpreted the move as a preemptive action ahead of the European Central Bank’s QE next week. It also suggests that after six years of unprecedented intervention, central banks are losing control of markets and events. An unraveling of the markets would send investors rushing towards safe-haven assets such as gold.

Gold Market Threats

Goldman Sachs reiterated its bearish outlook on gold, saying stronger U.S. growth should support higher real rates, thereby raising the opportunity cost of holding gold. Moreover, many of the fears that drove investors toward gold as a store of value, such as U.S. dollar debasement and high inflation, are now seen as moving in the opposite direction.

Along with the euro-cap rate abandonment, the Swiss National Bank lowered the negative interest rate on sight deposits to -0.75 percent from a previous -0.25 percent, as well as moving the three-month Libor target to between -0.25 percent and -0.75 percent. This came as a complete surprise to the market as most observers forecasted the cap to remain in place for years.

With the failure of rate hikes and substantial interventions to prop up the ruble, any further decline in the currency could force the Russian central bank to begin liquidating its gold reserves. As the major accumulator of bullion in recent years, this could put downward pressure on prices.

 

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