SWOT Analysis: China’s Money Supply Could Indicate Additional Room for Gold Demand
-- Published: Monday, 21 December 2015 | Print | Disqus
By Frank Holmes
Palladium followed by platinum was the best performing precious metals this week, up 2.87 percent and 2.23 percent, respectively. The platinum group metals responded positively to news that automobile demand continues to be strong globally, boosting platinum and palladium prices. The European Automobile Manufacturers Association reported over 1 million more car listings in November. The number of vehicle sales in China rose nearly 20 percent.
It seems that bullish gold investors may be able to breathe a little easier after the Fed finally made its decision to raise rates 25 basis points earlier this week. Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, commented that sentiment has shifted, and traders are seeing less downside potential in the gold price.
Goldcorp CEO Chuck Jeannes also said that he thinks the increase in rates will be a net benefit for the gold mining company, now that the uncertainty around the Fed’s action is behind us. Newsletter writer Dennis Garman was interviewed by ETF.com and he opined that we have likely seen the low in gold prices now.
With the hike in interest rates and the ensuing strength in the dollar the next day, it is not too much of a surprise that gold came in at the bottom in terms of price performance this week. What is nice is that this is the third Fed meeting in row that gold was stronger on the day of the announcement. Absent was the manipulative middle of night plus $1 billion dumping trades of gold bullion to push gold down on the Fed meeting dates. Fortunately for the perpetrators, the regulators were asleep.
More rate hikes could be on the way, warn some analysts. Macquarie analyst Matthew Turner said that if the economy continues to strengthen after this rate increase, then the Fed may go ahead with further tightening. Historically, gold doesn’t perform well in periods of tightening monetary policy with rising real interest rates.
Gold is headed for the third annual loss, according to BloombergBusiness. Societe Generale’s Alain Bokobza said bullion will likely drop to $955 per ounce by the end of the year.
Klondex Mines announced this week its acquisition of the Rice Lake Mine near Bissett, Manitoba. For the total purchase price of $32 million, Klondex is acquiring a fully operational mine, mill and fleet of equipment that was recently put on care and maintenance as the property went into receivership earlier in the year. Over $375 million of capital improvements have been made on the property since 2007 and the mobile equipment fleet was appraised at close to $20 million. Klondex plans to calculate a new resource for the operation and design a new mine plan for developing the ore in a profitable manner. It will likely be fourth quarter of 2016 before they start production back up. In our opinion, the prior operator had oversized the mill and dropped the cutoff grade to try and grow the number of ounces produced. To accomplish this they also got overextended on the debt side. Klondex has a great opportunity here to do the proper work and right size the operation so it can be profitable. Klondex Mines still offers investors an attractive opportunity to participate in the turnaround of Rice Lake.
According to research from Cornerstone Macro, the dollar has historically appreciated before the first hike and typically has depreciated afterwards. If the historical pattern is any indication, the dollar will not strengthen further as many of the flapping mouth airheads have pontificated, of course without looking at the facts.
China’s money supply far exceeds that of other developed nations. Bloomberg Intelligence noted this presumed spending power seems to indicate that China still has plenty of room for additional gold demand.
Commodity headwinds continue, as the Bloomberg Commodity Index closed at the lowest level in 16 years on Monday. The slowing commodities demand from China continues to affect the diversified mining companies, as China shifts to a service-driven economy.
Former U.S. Treasury Secretary Lawrence Summers and economist Nouriel Roubini said earlier this week that the Fed policymakers may be making a mistake if the rate hike was premature. There is still much uncertainty in the global markets about the prospects of growth and stalling growth rates in the U.S.
Deutsche Bank views gold miners as a possible hedge against global uncertainty. DB notes that the combination of deficit spending, poor merger & acquisition decisions and the China commodity demand slowdown have resulted in “toxic” levels for balance sheets. Markets have been watching these disturbing credit conditions, as Goldman Sachs noted that “U.S. corporate credit quality has deteriorated to the weakest level in a decade.” In this environment, DB favors a defensive posture in companies with stronger balance sheets and non-integrated names.
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