SWOT Analysis: Gold Headed for Largest Gain in Five Weeks
By Frank Holmes
Strengths
? The best performing metal this week was gold, up 2.50 percent. Gold traders are the most bullish they've been since January 26, according to Bloomberg's weekly survey. Gold is headed for its largest gain in five weeks after the Fed projected three interest rate hikes in 2018, easing concern that they would be more aggressive with four rate hikes for the year. The yellow metal historically rises after the Federal Reserve tightens monetary policy.
? Hecla Mining Company will acquire Klondex Mines for $462 million. Klondex shareholders will receive $2.47 per share in cash or shares of Hecla. This is a 59 percent premium to Klondex's 30-day average. Another big buy happened this week with Alio Gold entering an agreement to buy all the remaining shares of Rye Patch Gold Corp.
? This week saw worldwide holdings in exchange-traded funds backed by gold soar to 2,267 metric tons to reach the highest levels since May 2013. ETFs added 460,196 troy ounces of gold to their holdings last trading session, the most in 6 months, writes Bloomberg. Commodity ETFs also expanded more than fivefold this past week with precious metal ETFs leading the pack. Swiss gold exports rose 39 percent in February to 145.9 metric tons, with exports to India up by 94 percent and up 67 percent to China, the world's two largest gold consuming countries.
Weaknesses
? The worst performing metal this week was palladium, down 1.91 percent. The government of Mali is looking to revise their mining code, just as other African nations have done recently, which could negatively impact mining companies such as B2Gold who have 40 percent of their production located at their Fekola mine in Mali.
? Zambia will be conducting a tax audit of mining companies that have been operating in the nation in the past six years after uncovering that First Quantum Mineral Ltd. underpaid import taxes on mining equipment. The company revealed on Tuesday that Zambia is demanding $8 billion in interest, penalties and reassessment charges, reports Bloomberg. The Democratic Republic of Congo, who recently updated their mining code to increase royalties and taxes, will likely not be giving any concessions to mining companies who operate there.
? Eldorado Gold has been bumped down to a "sell" versus "hold" after the company's ability to realize its long-term value was questioned and downside risk has been increasing, reports Bloomberg. Desjardins analyst Josh Wolfson estimates that it will take more than 5 years for Eldorado Gold to realize value from its asset portfolio.
Opportunities
? Open interest in gold futures contracts rose to the highest level since January, ahead of President Trump's announcement of tariffs on China, reports Bloomberg. President Trump also announced this week that his new national security advisor will be John Bolton. China was reported to have intervened to support its stock market today after fears of a trade led to the steepest intraday selloff in six weeks.
? According to a Bank Credit Analyst report, net inflows to U.S. stocks and bonds have slowed from 3 percent of GDP in 2016 to 1 percent as of now. The broad basic balance (current account plus net Foreign Direct Investment) is worsening, which usually coincides with a weaker U.S. dollar. One of the most renowned gold investors, John Paulson, closed his gold fund amid investor sentiment of indifference to gold. However, from a contrarian this seems like a classic capitulation trade occurrence near a cyclical bottom.
? Bloomberg Intelligence's Mike McGlone writes that gold may soar to $1,400 per ounce if the dollar remains week and the trend doesn't reverse. The yellow metal is also showing signs of "increased life" after a second straight quarter of rising deals and slumping to the lowest levels in 4 years in Q3 of 2017, writes Bloomberg. Acquirer's seem to be more interested in mid -tier producers or near production projects. Cardinal Resources has been bumped to status of "buy" with PT set to A$0.93, up 71 percent from its last close and is just such a company that fits the mold of near production ready decision, as the size of the Namdini Project approached 8 million ounces.
Threats
? Libor-OIS, the London interbank offered rate for dollars over the overnight indexed swap rate, has more than doubled this year to the widest gap since 2009, reports Bloomberg. Some believe that this increase is due to changing investment behavior after the tax overhaul was passed last month. If the Libor-OIS continues to widen, this could lead to a sharper tightening of financial conditions than originally anticipated by central bankers, writes Liz Capo McCormick from Bloomberg News. Citigroup strategists Matt King and Steve Kang wrote that Libor "is still the reference point for the majority of leveraged loans, interest-rate swaps and some mortgages." The widening could also lead to funding and credit issues for banks.
? Deutsche Bank AG said that the euro's gain against the dollar will take a toll on their revenue this year. Europe's biggest investment bank expects a headwind of 300 million euros from currency effects and 150 million euros from higher funding costs of Libor-OIS. The VIX futures curve has traded into backwardation versus its normal contango, which is a sign that the stock market is under stress, reports Bloomberg.
? Leonid Bershidsky, writing for Bloomberg View, reported that President Trump's import tariffs are designed to benefit industries in political swing states, citing a study by researchers at the University of International Trade and Economics in Beijing and at the University of Virginia. The report shows that the 5 states who employ the most furnace operators are Indiana, Pennsylvania, Alabama, Ohio and Michigan - all swing states. In his first press conference since becoming chairman of the Federal Reserve, Jerome Powell said that policy makers "don't have the ability to see that far into the future" and advised investors against reading too far into the central banks' 2020 projections for interest rates.