SWOT Analysis: Gold Traders Overwhelmingly Bullish in Bloomberg Survey
By Frank Holmes
Strengths
? The best performing metal this week was palladium, up an impressive 7.17 percent after having been trending down since the middle of January. The weekly Bloomberg survey showed gold traders are overwhelmingly bullish after being bearish last week as the yellow metal is set for its best week since April 2016. A falling U.S. dollar has boosted demand for bullion as an alternative asset. Gold futures also had a big week, surging the most in 11 months, reports Bloomberg.
? On Wednesday figures were released showing the U.S. consumer price index rose 0.5 percent in January, higher than the estimated increase of 0.3 percent. This spurred gold to fall intra-day; however, it recovered to continue a rally. According to Bloomberg, gold futures rose 0.3 percent to $1,334.20 an ounce after falling 0.8 percent.
? The U.S. dollar continues to fall, leading to gold nearing a 3-week high and hitting $1,357.20, the best since January 26. Billionaire hedge fund manager John Paulson kept his holdings last quarter in the SPDR Gold ETF while Bridgewater Associates increased its position, signaling a bullish time for gold. Gold was further supported due to Indian jewelers purchasing metal to keep up with wedding season demand.
Weaknesses
? The worst performing metal this week was silver, still up 1.77 percent. Money managers flipped to bearish from bullish as shorts outnumbered longs. The world's largest ETF tracking gold mining companies, VanEck Vectors Gold Miners ETF, saw $556 million in assets pulled by investors in December with a total of $3 billion pulled out last year. Greenlight Capital sold its stake of 7.9 million shares due to Barrick Gold, the ETF's second-biggest holding, underperforming. The ETF recovered much of that this week with six straight days of inflows totaling $669.1 and total assets held at $7.82 billion. All this money is chasing gold beta and not focusing on what the valuation metrics are for the index members. Investors are buying ETFs without regard to the fundamentals of the companies they own.
? This week several gold companies reported poor performance, fourth quarter losses or production woes according to Bloomberg. Kinross Gold reported fourth-quarter revenue of only $810.3 million while the lowest estimates were $822.0 million. Yamana Gold reported unexpected fourth-quarter losses of 20 cents per share while estimates predicted only a 3 cent loss per share. Acacia Mining canceled its dividend and announced that its gold production will fall around 38 percent this year due to an ongoing dispute with the Tanzanian government. Barrick Gold is heading for its eighth straight year of declining production with expectations of 4.5 to 5 million ounces of gold drawn from mines in 2018. This is partly due to Acacia Mining's losses, as Barrick Gold is their majority shareholder.
? This week the results of the New York Fed's Survey of Consumer Expectations showed that consumers expected to see the fastest wage growth in years. According to Bloomberg, last month was only the third month in the survey's 56-month history where expected wage growth of 2.73 percent exceeded consumer price inflation at 2.71 percent. The Labor report released earlier this month of hourly earnings rising 2.9 percent on average triggered the most severe stock market volatility in many years.
Opportunities
? The core consumer price index rose 0.3 percent in January, higher than the predicted 0.2 percent rise. Bloomberg writes that faster-than-projected inflation and unexpected declines in retails sales aren't as bad for the economy as it may seem. American businesses are facing higher production costs as the Empire State Manufacturing prices-paid index increased 12.4 points to 48.6 this month.
? The dollar continues to take hits after a vote to increase spending by $300 billion over the next two years came shortly after $1.5 trillion in tax cuts. Bloomberg reports that the dollar's outlook looks bleak as the U.S. deficit is approaching 6 percent of gross domestic product. High inflation has historically been positive for gold and the currently plunging dollar could set the stage for a new gold bull market. Fawad Razaqzada, technical analyst at City Index, said that gold prices have managed to hold onto crucial retracement levels and that "buyers are in control of this market and prices are going higher."
? Pure Gold Mining released strong drilling results this week that exceeded expectations. Its Madsen Gold Project saw increased widths and grades of 26.4 grams per ton over 12.7 meters, and underground drill holes have expanded the known mineralization outside of the current mineral resource.
Threats
? Global bond funds experienced the fifth-largest week of redemptions ever last week with $14.1 billion pulled out of debt funds with $10.9 billion taken from high-yield bonds alone on fears of higher interest rates, reports Bloomberg. The world's third-largest fixed income ETF also saw massive outflows with $921 million leaving in a single day this week from the iShares iBoxx $ Investment Grade Corporate Bond ETF. Inflation and rate hike fears are creeping into the broader market but bondholders have read the tea leaves.
? South Africa's Chamber of Mines is arguing for the 2017 Charter to be reviewed on multiple grounds that deal with its legality and constitutionality. The new 2017 Charter sought to create more fees and royalties on the miners and reintroduce Black Economic Empowerment initiatives that had previously been fulfilled.
? Companies are citing rising inflationary trends that didn't exist a few years ago that hike the price of fuel, power, labor and more. Kinross Gold Corp fell as much as 10 percent this week.