SWOT Analysis: Gold Sales in India Continue to Weaken

Strengths

The best performing metal this week was palladium, up 1.98 percent. Even after a weekly loss, gold traders and analysts stayed bullish on their outlook for prices in the weekly Bloomberg survey. Stocks continue to swing and currencies fluctuate ahead of continued U.S.-China trade talks. Just like last week, palladium hit a fresh all-time high this week of $1,707.51 an ounce, according to Bloomberg data. September marked the 10th straight month of gold buying for the People's Bank of China, adding 5.9 tons and bringing total holdings to 62.64 million ounces. China has added over 100 tons to its reserves in the last 10 months, demonstrating that it sees value in the metal. President Trump announced on Friday that the U.S. is deploying around 3,000 troops to the Middle East to enhance the defense of Saudi Arabia from Iran. The announcement came just after news broke that an Iranian tanker was hit by two missiles near the Saudi Arabia coast. The deployment of more troops sends a conflicting message as earlier in the week Trump announced pulling back U.S. forces in northern Syria in order to bring troops home. Increased geopolitical tension has historically been good for gold as it can raise its appeal as a perceived safe haven asset. In a sign of good shareholder activism and a push for better corporate governance, Marlin Sams Fund, a long-term Torex Gold Resources shareholder, sent a letter to the company's board. Marlin wrote that it is concerned with the interlocking relationship between Torex and TMAC Resources. Torex is reportedly considering an acquisition of TMAC. However, three of the directors of Torex also serve on the TMAC board. The letter says Marlin "calls into question the ability of the current Board to evaluate any important strategic matter."

Weaknesses

The worst performing metal this week was gold, down 1.01 percent. Gold sales in India, the world's second largest consumer of the metal, continue to weaken. Around the Dhanteras holiday, gold buying usually increases for jewelry. However, weak demand due to higher prices might decrease sales by 50 percent this year, according to the national secretary of the India Bullion and Jewellers Association. Gold imports fell 68.18 percent in September compared to a year earlier. Jewelers are struggling to find buyers because of the higher prices and companies are giving big discounts. On the other hand, imports of silver, the poor man's gold, jumped 72 percent in India from a year earlier to 543.21 tons in August, reports Bloomberg. Increased silver buying could make up for the decreases in gold. Ecuadorian President Linin Moreno accused his opponents of attempting a coup as the government moved outside of the capital city Quito. Violence and protesting erupted last week when Moreno announced an ending of long-standing fuel subsidies. Instability in the country could be negative for miners by disrupting operations and higher fuel prices could hurt margins. Bloomberg reports that indigenous communities have blocked off some main roads and that demonstrators caused the shutdown of production at an oilfield. Bloomberg reports that the sale of Iamgold Corp. has stalled after the miner failed to reach an agreement with several Chinese suitors. Resolute Mining's Syama Gold mine is facing a production stall after a crack in the roaster, a key component in sulfide processing, was found and is being evaluated.

Opportunities

UBS continues to support gold and forecasts prices to reach $1,650 over the next 12 months. Dominic Schnider, head of commodities and APAC macro, rates and foreign exchange at UBS, told Bloomberg TV in an interview that "we expect the Fed to cut several times, and so real rates are in negative territory: why would you not own gold?" Schnider added that gold can help balance a portfolio.Even as the gold price appears to have stalled, money is still flowing into ETFs backed by the metal. Inflows have increased for 18 sessions in a row, the longest run since 2009. Citigroup says that inflows are "likely to persist" and sticks with its forecast for a rally to $1,700 an ounce over six to 12 months, writes Bloomberg.

It was another great week for the two lesser known precious metals. Impala Platinum Holdings agreed to acquire 100 percent of the outstanding shares in North American Palladium Ltd. for $758 million in cash, reports Bloomberg. The deal highlights the attractiveness of palladium, which is seeing higher prices due to growing demand for its use in catalytic converters. An index of South African platinum producers rose to its highest level since April 2014 this week. Platinum has risen 12 percent so far this year, while South African producers have surged 132 percent. For valuing the assets of North American Palladium, a base price of $1,100 per ounce of palladium was used. With spot palladium prices of $1,700, there is certainly room for an interloper to make a higher bid.

Threats

The Federal Reserve announced on Friday that it will begin buying $60 billion of Treasury bills per month to improve its control over the benchmark interest rate it uses to guide monetary policy, reports Bloomberg. Turmoil rocked money markets in September when the rate on overnight general collateral repo jumped to 10 percent, which is four times the usual level. Concerns are growing on whether or not the Fed can serve as a conduit for liquidity in times of stress and growing debt levels.Federal Reserve Bank of Dallas President Robert Kaplan said in a Bloomberg TV interview this week that rate cuts "should be limited, restrained and modest" and that right now we are "in a fragile period." The comments could dampen investor enthusiasm that has sent inflows into gold-backed ETFs soaring. UBS also sent a warning this week that U.S. households are struggling financially. According to a quarterly UBS survey, 44 percent of consumers reported that incomes do not cover expenses, or barely cover them. Additionally, just 17 percent of households reported in the survey that their financial condition had improved in the last six months, which is 3 percentage points down from a year earlier. Although mining stocks are up in the region, output of platinum-group metals in South Africa, the world's largest producer, shrank the most in 18 months in August, reports Bloomberg. Production contracted 12.5 percent from a year earlier, according to Statistics South Africa. As supply tightens, holdings in palladium ETFs have expanded almost every day in the past two weeks.

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