SWOT Analysis: Why Bullion Looks Cheap Compared to U.S. Equities
-- Published: Tuesday, 20 December 2016 | Print | Disqus
By Frank Holmes
The best-performing precious metal this week was platinum, up 1.20 percent for the week after surging 3.48 percent on Friday when the December 16 issue of Science published research on a new fuel cell design using an atomically ordered platinum and lead core surrounded by a thick uniform shell of four platinum layers. The new design can undergo 50,000 voltage cycles with a negligible decay in performance and no apparent changes in their structure or elemental composition which has been a weakness in previous fuel cell designs.
China’s gold withdrawals surged in November, according to the monthly report from the Shanghai Gold Exchange. The increase of 214.72 tonnes was a 40 percent rise over the October figure. This level of demand puts China on track to potentially maintain its position as the world’s largest gold consumer. Kitco also reports that China may be unofficially restricting gold imports. Rumors and reports indicate that international banks are having difficulties with their imports, as the People’s Bank of China is taking longer to approve each importing transactions. The central bank may be trying to unofficially restrict gold imports to curb high capital outflows from China’s investors.
Bloomberg reports that gold imports by India climbed 10 percent in November, to the highest this year. After pressure on gold demand due to higher prices, an excise tax and anti-corruption measures, overseas purchases rose to 111 metric tons , compared to 101 tons a year earlier. Zerohedge also reports the rush to buy gold in the midst of the disruption has consumers paying as much as a 50 percent premium above official India prices. India’s top gold importer, Axis Bank, has reportedly suspended the bank accounts of some bullion dealers and jewelers after some executives were arrested over money laundering.
The worst performing precious metal this week was palladium, down 4.73 percent. Palladium, which is up 23.75 percent this year, seemed to trade more in line with the sentiment towards gold and silver but did not see the Friday bounce the other metals experienced.
Gold mining company Gold Reserve, Inc. is still owed $300 million for its first installment from Venezuela for the seizure of a mining project. The payment was due on November 30, pushed back from the original date of October 31, but the country requested an extension to December 15. Now that deadline has passed also.
The Mexican Environmental Authority has denied the environmental impact assessment of Argonaut Gold Inc.’s planned San Antonio project in Baja California Sur, Mexico. The company believes it can provide the needed information to the Mexican agency quickly.
Macquarie Research has published a positive report on GFG Resources, a new precious metals explorer that holds a 100 percent district-scale interest in the Rattlesnake Hills gold project in Wyoming. Macquarie reports that senior mining companies previously validated their interest prior to the district being consolidated. This project targets an alkaline gold deposit, which is a relatively rare type of deposit, but alkaline-related rocks have historically been associated with giant scale gold deposits.
As the Federal Reserve plans to raise rates three times in 2017, this hinders the recovery in gold, as pointed out in a note from Canaccord Genuity, which sees marginal downside risk to gold and gold equities. The price ratio between gold prices and the S&P 500 has fallen to last December’s low. “In other words, as an asset class, the bullion has become very cheap relative to U.S. equities,” analyst Martin Roberge notes.
Bank Credit Analyst (BCA) points out that realistically, it will take time for the incoming Trump administration to draft legislation that deploys fiscal stimulus – at least six months. It will then take time to see if it works. Given this reality, BCA’s team notes that the U.S. dollar and real rates “have moved too far too fast, and likely will correct.” Where BCA differs from consensus is that the rising inflation expectations they measure in the forward markets are probably warranted for 2017. If growth materializes with stimulus, overlaid on a labor market that is close to full employment, the low inflation consensus could shift higher. This could depress real rates and provide a more attractive outlook for gold in 2017.
Troy Gayeski, senior portfolio manager at SkyBridge Capital, reflected this sentiment, saying, “The Trump victory has delivered the sum of all fears to gold investors due to the combination of anticipated pro-growth tax reform, a rollback of the hyper-regulation of the Obama administration, and the potential for fiscal stimulus.” He also noted that additional Fed tightening, increase in interest rates and the strong dollar have hampered gold’s appeal. UBS points out that sentiment toward gold is quite negative currently, but there are no signs of panic in the market as selling had been orderly.
Recent gold selling implies fresh shorting and liquidation, notes HSBC Global Research. The firm notes that selling, while likely to slow, may not yet be exhausted, and gold is nearing the $1,100/ounce support level.
The Federal Reserve’s announcement that they may raise rates three times in 2017 has put pressure on gold. However, David Doyle of Macquarie Research states that the research firm believes a two-rate hike year is more likely. Doyle points out that some of the more hawkish voting members of the Federal Open Market Committee (FOMC) will change next year and likely will be replaced by doves. Doyle noted six of the FOMC participants favor just one or two hikes in 2017 and Yellen and Dudley are likely in this group.
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