Gold Investors Weekly Review – January 9th

In his weekly market review, Frank Holmes of the summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,221.6 up $35.4 per ounce (+2.96%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, gained 0.92%. The U.S. Trade-Weighted Dollar Index rose 0.92% for the week.

Gold Market Strengths

HSBC raised its 2015 gold forecast to $1,234/oz from a prior $1,175 citing the possibility of increased gold demand should strength in the dollar lead to dislocation in the currency markets, along with enhanced geopolitical risk.

Bullish gold bets by hedge funds increased for the first time in three weeks and have more than doubled since mid-November. Concurrently, short holdings dropped for the sixth week in seven. These actions come as political turmoil in Greece and government actions in Asia have sent gold prices to their biggest monthly advance since June.

The CME Group announced it is expecting to launch a one-kilogram gold physical delivery futures contract in Hong Kong on January 26. It will be tied directly to .9999 gold prices in Hong Kong and be physically delivered in Hong Kong to provide access to round-the-clock price discovery for the Asian gold market. Asia is the top consumer of physical bullion in the form of jewelry, bars and coins, but there is growing disenchantment with benchmark prices set in the West, which tend to be influenced by speculators. This new futures contract market will establish a price reference in the top consuming region and better reflect Asian demand.

Gold Market Weaknesses

Declines in precious metals prices fueled a drop of more than $20 billion in commodity exchange-traded product holdings in 2014. The decline in value of global commodity ETF holdings was almost entirely driven by a fall in commodity prices, rather than investor outflows.

Barrick Gold was downgraded to “Underperform” from “Neutral” at Macquarie Research and was given a 12-month target price of C$11.00. Additionally, RBC Capital Markets also downgraded the stock to “Sector Perform” from “Outperform” and cut its price target to $14 from $17. Reasons cited were uncertainty about the company’s debt and capital allocation.

Rough diamond prices suffered the biggest quarterly decline in more than two years falling 6.9 percent in the last three months of 2014 as banks tightened credit to the industry, forcing traders, cutters and polishers to sell more inventory. Ed Sterck, analyst at Bank of Montreal, explained, “If you’re a cutter or polisher of rough whose available liquidity is being reduced you’ve got to adjust your inventory. Selling inventory to increase cash has the knock on effect of increasing the supply of polished diamonds.” Diamond output fell to about 146 million carats last year from a 2006 peak of 176 million carats as the industry faces a dearth of new projects. Sterck forecasts this to be a temporary six-month blip unless there are further reductions in liquidity.


Gold Market Opportunities

The fundamentals of the global gold market could point to modestly higher prices in 2015, according to commodities analyst Victor Thianpiriya from ANZ Bank who forecast gold prices to average around $1,238/oz. Thianpiriya believes gold has priced in a lot of the downside already, providing long-term investors with an attractive entry point.

While the dollar is up around 8.5 percent since the start of November, gold has risen around 7 percent and has broken free of its normal inverse correlation with the dollar. This reflects a near 50 percent fall in Comex fund shorts over this period, while the ongoing decline in gold ETFs appears to have bottomed. Furthermore, strong Indian and Chinese demand, and an unexpected physical squeeze in early December which drove one-month lease rates to six-year highs, have combined to underpin the spot market. Recent developments suggest gold’s 3.5-year correction from its third-quarter 2011 all-time highs may have now run its course.

Big mining costs are expected to fall in first quarter 2015 as the fall in oil prices will have a positive effect on operating costs at mines employing diesel-powered equipment and particularly those which rely on oil-fueled generators. Energy consumption can account for as much as 40 percent of some mines’ operating costs, particularly those in remote locations which have no access to grid power.


Gold Market Threats

Despite continued physical demand in Asia, gold prices are expected to drop in 2015 according to analyst Suki Cooper from Barclays. She notes that gold’s correlation with oil prices and the euro/dollar has strengthened, hitting about 40 percent in the last three months. Combining that with her view of a U.S. interest rate hike in mid-2015 sets gold up for significant pressure. Cooper also highlighted that Russian gold reserves could be a risk to the market. Russia has been the largest purchaser of gold in recent years, but continued weak oil prices and the resulting pressure on the ruble could force it to make large gold sales. Barclays forecast gold to average $1,180/oz in 2015 and add that robust demand across both India and China would allow the metal to find a stronger floor.

INTL FCStone has said iron ore will probably extend declines in 2015 as global supply exceeds demand and the world’s largest producers plan to continue adding production.

Black Swan Plc came out with its 2015 new year newsletter talking about how the BRIC (Brazil, Russia, India, China) countries are far closer to an alternative world financial system than the West believes or is prepared to state publicly. The building blocks of this go as follows: Expecting inflation to come back to the U.S. as a result of the QE programs, China has stopped buying U.S. debt. Instead, it and the other BRIC countries have set out to create various alternative financial institutions. One is the “BRICS Bank” which was formally brought into being in July 2014. Another is the Asian Infrastructure Investment Bank (AIIB) which was first floated by China in October 2013. Then there is the Silk Road infrastructure fund which was announced by China in November 2014 with an initial contribution from China of $40 billion. This puts an aggregate value, of China’s contributions only, for the three institutions of $340 billion. Compare this to existing institutions where IMF assets in special drawing rights (SDRs) are around $309 billion, The World Bank is $223 billion, Asian Development Bank is $163 billion. So in the space of 24 months China has put in place new financial institutions which, with contributions mainly from China, have nearly 50 percent of the assets of the existing major international financial institutions of the West. Add to that the steady increase in trade denominated in Renmimbi which will only be furthered by these institutions and the dollar will be pressured into an ever diminishing role as the world trade currency of choice.

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