-- Published: Tuesday, 27 December 2016 | Print | Disqus
The best performing precious metal for the week was gold, down just 0.08 percent. Gold is steady in year-end holiday trading, reports UBS, and is trying to form a base around these levels. Physical markets have perked up, helping the market find stability. UBS says there is lack of urgency to jump into the yellow metal right now, and there “is room to be patient and gradually build strategic positions.” Similarly, Comerzbank AG believes gold is finding support from slightly declining bond yields and a marginally weaker U.S. dollar.
India’s Commerce Ministry has recommended slashing the duty on gold imports from 10 percent to 6 percent, reports Bloomberg, as the higher duty encourages smuggling of the precious metal.
In other gold-related news from Deutsche Bank, the group assesses the value of the gold “cost curve” when it comes to providing a fair value reference for the metal. Skeptical at first, the bank now recognizes that since 2000, the 90th percentile producer has been a good indicator of the minimum weekly gold price in a given year. “Under these assumptions, the gold price in 2017 would average $1,200 an ounce, with the minimum weekly price falling to $1,060 an ounce.
The worst performing precious metal for the week was palladium, down 5.39 percent. Russia reported that palladium output rose 1.7 percent on the year. The market may also start to get nervous about the likelihood that China removes its tax incentive on sales of small-engine cars at the end of the year where palladium is used in the catalytic converter to clean pollutants from the exhaust. Chinese car sales having been booming in recent months at an unsustainable pace so we could see weaker sales in 2017 if there is a change in policy.
The Bloomberg Dollar Spot Index is heading for its best quarter since 2008, reports Bloomberg, on the back of Donald Trump’s election and the boost in interest rates by the Federal Reserve. Gold is holding near 10-month lows, according to another Bloomberg story and their survey of traders shows they are net bearish for a second week. Holdings in gold-backed ETFs contracted for a twenty-ninth day, as of Thursday, extending the longest run of ETF sales since September 2004. Gold prices have fallen for six straight weeks and hedge funds cut their bets on a rally to the lowest since February.
In a press release this week, New Gold Inc. announced that Hannes Portmann has been named President of the company. Randall Oliphant will continue in his role as Executive Chairman and Brian Penny will continue as Executive VP and CFO. In a note from JPMorgan this week, the group highlights another company with management changes. After 20 years with Eldorado Gold, CEO Paul Wright has decided to retire, gifting his role to George Burns, the current COO of Goldcorp.
UBS writes that precious metals could enjoy some upside come January, according to 10 years of historical monthly performance from 2006 to 2015. The data shows that for gold, January offers the best average monthly return at 4.35 percent, with just three negative Januarys in the sample (better than any other month). Similarly for silver, January offers the best average monthly return at 6.01 percent, with just three negative Januarys as well and also better than any other month. Bloomberg also shares an outlook for gold, using five charts to explain why miners are running out of the metal: 1) dwindling discoveries, 2) capex cuts, 3) falling reserves, 4) supply crunch coming and 5) the race for reserves: M&A. Exploration and development companies which can make or have a significant discovery should remain well bid.
Millennials in China now account for 68 percent of diamond jewelry sales by value, according to research from De Beers SA, the world’s biggest diamond producer. Millennial women, defined by De Beers as those aged from 18 to 34, spent about $26 billion on diamond jewelry in 2015 in the world’s four main markets (acquiring more than any other generation), reports Bloomberg.
U.S. debt dynamics are set to turn positive for gold in 2017, writes ICBC Standard Bank in a recent note, highlighting that the costs of higher yields are being overlooked. The Congressional Budget Office (CBO) calculates that net interest payments on the around $14 trillion of U.S. debt, will amount to around $250 billion this year (around 1.4 percent of U.S. GDP). “If we apply an 80 basis point increase to the CBO’s net interest forecasts and keep the other variables unchanged, then by 2026 the Treasury would be paying an additional $185 billion in interest annually, and interest will have increased to 3.3 percent of GDP,” the report continues. In the note Tom Kendall stresses the key point is that the financing costs for the U.S. have already jumped, whereas the Trump administration’s policies may or may not have a positive impact on U.S. growth and the effects will be lagged. Thus any disappointments on the growth front combined with higher interest costs and contentious negotiations on raising the debt ceiling in the first quarter, could well result in a more bullish scenario for gold.
As David Rosenberg highlights in a piece for The Globe and Mail, back in September Donald Trump declared that markets are in a “big, fat ugly bubble.” Rosenberg believes Trump may be right on this one – this is the most expensive market in 15 years. In fact, if the P/E ratio does its own version of mean-regression, then the equity market is discounting 33 percent earnings growth in 2017. “Look, if the market was even discounting 10 to 15 percent earnings per share growth, there is some moderate upside,” he continues. “But Mr. Market is priced for a one-in-20 event that only occurs at the early stages of the cycle, not heading into year number eight.”
With equity markets in record territory, Drew Mason from St. Joseph Partners also notes what this has done for the bond market (losses approaching $2 trillion since the election). Mason writes, “It appears likely that at some point, bondholders will begin to increase allocations to gold and silver.” California Public Employees’ Retirement System announced it is looking to pair back its global equity and private equity exposure by 5 percentage points in favor of a larger allocation to real assets, inflation and liquidity asset classes.
While total gold imports into India were up 28 percent in November from October, much of the flow likely reflects the immediate reaction to the demonetization of 1,000 and 500 rupee notes, reports UBS, whereby consumers turned to gold amid policy uncertainty. UBS thinks gold purchases could be affected by the transition from cash to electronic/digital payment systems. It seems as if you have wealth outside of a government approved account, it is seen as “dirty money” and is confiscated. This type of policy change could put downward pressure on gold demand. A headline from the Economic Times sums up the situation quite well: “Gold’s global safety net fails as India demand dries up on cash ban.”
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