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SWOT Analysis: Is Gold Production Peaking?


 -- Published: Monday, 31 August 2015 | Print  | Disqus 

By Frank Holmes

Strengths

  • Platinum prices were off 0.14 percent this week, holding in as the best performer of the precious metals group. Gold bullion, though down for the week also saw a pickup in the net long position by the non-commercial, according to data released by the Commodity Futures Trading Commission (CFTC). 
  • Funds backed by gold saw the biggest inflows of assets in seven months on speculation that the U.S. Federal Reserve may hold off on raising interest rates. New York Fed Governor William Dudley said on Wednesday that the case for raising rates in September is increasingly doubtful after recent turmoil in global stock markets, particularly stemming from fears about weakened Chinese growth. Separately, Minneapolis Fed President Narayana Kocherlakota said he sees ways to lower interest rates further, citing asset-purchase tools.
  • According to France’s Economy Minister, the country plans to open new mines, including gold mines.  Rarely does France make the news concerning gold mining; perhaps this is a sign of a greater interest in hard assets versus currency reserves.

Weaknesses

  • Silver did not fare as well as gold, finishing the week down 4.79 percent. The net long position in silver only ticked up modestly while total known holdings in silver ETFs actually fell 0.14 percent.  Palladium was much weaker than platinum, down 2.50 percent and the net long position actually contracted this past week.  Perhaps the markets have seen a near-term peak in car sales.
  • Gold had the biggest weekly drop in a month after data showed that the U.S. economy grew more than previous estimates in the second quarter. Subsequent to the GDP release, traders priced in a 30 percent chance that the Fed will raise rates next month, up from 24 percent a few days prior.
  • De Beers is set to cut diamond prices by as much as 9 percent after production cuts failed to support demand for precious stones. DeBeers, along with other diamond producers, are under pressure to cut supply and lower prices as traders, cutters and polishers struggle to turn a profit amid a squeeze on credit and languishing jewelry sales.


Opportunities

  • According to Metals Focus, gold output will start declining as soon as next year and production will plunge 18 percent by the end of the decade. Global mine output surged 24 percent in a decade to a record 3,114 metric tons in 2014, as companies dug more to exploit a 12-year bull market in prices.


  • Expect more news next week that could impact gold as the annual retreat at Jackson Hole gets into full swing.  News stories going into the meeting have had a more accommodative slant to them with the recent enhanced market volatility that investors have had to contend with.
  • In a recent letter to clients, Ray Dalio, the head of Bridgewater, the world’s largest hedge fund, said that the likely path for the Federal Reserve is to embark on another round of quantitative easing instead of the expected interest rate hikes.

Threats

  • Mohamed El-Erian has come out with a defense as to why QE4 is not in the cards. First, he said the Fed is now set to normalize monetary policy, not venture deeper into unchartered territory. Second, unconventional policies haven’t proved as effective as expected in stimulating high and sustainable growth. Third, the origin of the financial market dislocation is outside the U.S. this time. Last, having exited the third round of easing in a relatively orderly fashion in October, the Fed would be hesitant to place itself in the same position again, not only for economic reasons but also because of the political risks involved.
  • RBC cut its gold forecast for the second half of 2015 to $1,125 per ounce from $1,288 per ounce, citing weakness from the expected Fed rate hike and the Chinese yuan. 
  • Macquarie says the gains in gold are unlikely to be sustained and investors should remain cautious until the Fed acts. The company cut its 2016 gold forecast to $1,163 per ounce from $1,363 per ounce.

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 -- Published: Monday, 31 August 2015 | E-Mail  | Print  | Source: GoldSeek.com

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