Gold Investors Weekly Review – August 1st

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 $1293.33, down $13.82 per ounce (-1.06%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 2.11%. This was the gold investors review of past week.

Gold Market Strengths

Gold prices rose the most in two weeks after U.S. employers added fewer workers than forecast last month, increasing pressure on the Federal Reserve to maintain lower interest rates. In addition, a Bloomberg survey shows gold traders and analysts have turned bullish on gold prices, as tension over Ukraine and the Middle East escalate. Lastly, flows into exchange-traded products backed by precious metals turned positive for the year. These products took in around $540 million in July, fully reversing the net outflow of $319 million in the six months through June.

Gold Market Weaknesses

Gold declined to a six-week low before Friday’s U.S. jobs report as a result of stronger U.S. economic data and the continuation of the U.S. dollar breakout. Wednesday’s GDP report for the second quarter showed the economy grew 4 percent in real terms from last year, beating analysts’ expectations for a 3 percent rise. The U.S. dollar also found support after the Federal Open Markets Committee (FOMC) meeting, where it was decided the Fed will continue to taper its bond purchases as planned, while keeping an eye on labor slack. Lastly, ISM Manufacturing expanded in July at the fastest pace in more than three years, showing U.S. factories will help power the economy after a second-quarter rebound.

Gold Market Opportunities

The Swiss National Bank (SNB) posted record profits of 16.1 billion francs for the first half of the year, as its gold holdings climbed in value. The news brought forward discussion on a 2011 Swiss public initiative which seeks to institute a policy so that the SNB holds at least 20 percent of its reserves in gold, a level that would require the SNB to purchase a large amount of gold in the open market. The initiative would also block the sale of gold holdings by the SNB. The initiative is not surprising considering earlier studies have shown that, for a portfolio of foreign currencies, gold is the best diversifier and enhances the portfolio’s risk-adjusted return. Central banks in many parts of the world have realized the value of gold within their portfolios, which is why central banks have been net gold buyers since 2010.

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Adam Graf of Cowen and Company published his second M&A report on the gold space this week. The report sees miners’ balance sheets improving going into 2015, with the average Net Debt to Capital across the top six North American producers possibly being reduced by as much as 25 percent, thus allowing for acquisitions. Since last November’s report, several juniors have advanced their assets, however, with little effect on share price. As a result, Graf believes this disconnect provides a unique opportunity for seniors to purchase less risky assets at relatively the same price versus a year ago. Some of his preferred takeout candidates include Pretium Resources, Seabridge Gold, Imperial Metals, and Romarco.

Gold Market Threats

The recent breakout of the U.S. dollar has posed strong headwinds for commodities, especially gold. This pressure is unlikely to stop in the short term as other major currencies continue to weaken, namely the euro and the British pound, as European sovereign yields reach multi-century to all-time lows. These yields, while absurd to some, are a direct response to the threat of deflation in the eurozone, which just this week posted its lowest inflation number since 2009. As such, speculators who have been on the short side of the gold trade are given more incentives to double down on their short calls and add short-term pressure to the gold price.

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