Etikett: Gold price

Investors buy gold as ‘fire and fury’ envelopes markets

ETF Securities Investors buy gold as ‘fire and fury’ envelopes marketsInvestors buy gold as ‘fire and fury’ envelopes markets

ETF Securities Weekly Flows Analysis – Investors buy gold as ‘fire and fury’ envelopes markets

  • Geopolitical tensions see investors look to gold as a safehaven, with 3rd consecutive week of inflows.
  • Long USD inflows reach the highest level in 18 months, totalling US$27.4mn.
  • Oil ETP outflows continue for 4th consecutive week on OPEC global market rebalancing doubts.
  • Platinum group metals outflows begin as palladium gains divorced from fundamentals.

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Geopolitical tensions see investors look to gold as a safehaven, with 3rd consecutive week of inflows. President Trump’s recent ‘fire and fury’ comments about the simmering tension over the North Korean nuclear situation have sparked gold to life. The gold price has rallied over 2% as investors have flocked to the metal as a portfolio hedge against risk. Certainly, with the spike in the VIX and the decline in global equity markets since the escalation in geopolitical risk, such portfolio rotation towards more defensive investments have been justified.

Long USD inflows reach the highest level in 18 months, totalling US$27.4mn. Investors appear to be indicating that the case for tighter US policy is more justified than for other major developed economies: the UK is beset by Brexit related fears, while the Eurozone and Japanese inflation pressure is almost non-existent. Meanwhile USD futures market positioning has slumped to the lowest levels in over three years – since May 2014. The inflows for the USD ETPs have been broadly split between the British Pound, the Japanese Yen and the Chinese Renminbi.

Oil ETP outflows continue for 4th consecutive week on OPEC output cutback doubts. Investors have withdrawn US$64.6mn from long oil ETPs – the fourth consecutive week of outflows – as crude prices have rebounded nearly 7% over the past week. Oil has certainly lost its lustre for investors, despite a strong stock withdrawal from the US and continued rhetoric from the International Energy Agency about demand being set to recover in the second half of the year, in turn rebalancing the global oil market. With peak seasonal demand coming close to an end and OPEC’s meeting in Abu Dhabi – forecast by some to provide a dressing down to poorly complying members – being a non-event, investors feel that the prices are reaching a near-term peak. We continue to expect that oil is likely to remain rangebound between US$40-55/bbl.

Platinum group metals buck the precious metals trend, with outflows totalling US$12.4mn. The ‘other’ precious metals have largely industrial applications and therefore have little perception as safehaven assets. After strong gains, particularly in palladium, investors have begun to take profits. Palladium’s first outflows in five weeks comes after 33% run up over 2017, which appears somewhat divorced from fundamentals. Futures market positioning, nonetheless, remains near multi-year highs.

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ETF Securities Research team
ETF Securities (UK) Limited
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Gold Reacts to Fed Hawks in June

Gold Reacts to Fed Hawks in June

VanEck Joe Foster Gold Reacts to Fed Hawks in June

Gold continued its range-bound trading pattern, fluctuating between $1,200 and $1,300 per ounce since January. In June the price fell $27.39 (-2.16%) to end the month at $1,241.55. On June 14, the Fed raised rates for the fourth time in this rate hiking cycle. A common pattern emerged for the first three rate hikes with gold price weakness ahead of the hikes, followed by a rally to higher prices immediately after each hike. This pattern then changed, as gold reached its high for the year ($1,298 per ounce) on June 7 before the hike and subsequently trended lower for the rest of the month. Gold came under pressure as hawkish statements by the Fed following the Federal Open Market Committee (FOMC) meeting raised the odds of a fifth rate increase later in 2017.

The U.S. dollar gained strength temporarily following the FOMC meeting, but ended June with a 1.4% loss, as measured by the U.S. Dollar Index (DXY),1 which fell to nine month lows. The weakness was caused by comments from top officials from the European Central Bank (ECB) and Bank of England (BOE), which the markets interpreted as suggesting that some removal of monetary accommodation could be warranted soon. Also weighing on the U.S. dollar was the International Monetary Fund (IMF) downgrade of its 2018 U.S. GDP growth forecast to 2.1% from 2.5%. The global economy appears to be set to outpace the U.S. economy over the coming year.

Gold Hurt by Intense Selling Pressure, and Possible Manipulation

The June performance of gold was disappointing given the weakness in the U.S. dollar. Gold normally has an inverse correlation2 with the dollar. However gold came under intense selling pressure that looks suspiciously like someone was set on manipulating the market lower. On June 26 before European markets opened at 4:00 a.m. U.S. Eastern Time, the futures market was hit with a 1.8 million ounce sell order that drove the price down $18 in an instant. The selling came during off hours when liquidity was light and it pushed the price below the technically important $1,250 per ounce level.

Further selling pressure on the day before the Fourth of July holiday in the U.S. had gold looking to test the $1,200 level. We have not seen this type of (presumably) manipulated selling pressure since the bear market period from 2013 to 2015. We assume this activity originates with banks or hedge funds attempting to generate a profit, or with a government attempting to dampen competition with the U.S. dollar. We will never know the source, or whether it is part of a broader conspiracy, so we do not waste further time considering the possibilities. In the longer term, the market is too broad and deep to be manipulated successfully.

Mixed Results for Gold Equities

Gold stocks were mixed in June. The NYSE Arca Gold Miners Index (GDMNTR)3 followed gold lower with a loss of 2.87%, whereas the MVIS™ Global Junior Gold Miners Index (MVGDXJTR)4 posted a gain of 5.59%. The junior miners are showing some mean reversion after being oversold ahead of a major Index rebalance that occurred on June 16.

Waiting for a Strong Catalyst to Propel Gold off its Base

Since the bear market ended in December 2015, the price of gold and gold shares has been forming a base. We have yet to see a strong catalyst, however. Thus far in 2017, U.S. dollar weakness and a general nervousness on many geopolitical fronts have provided solid support for gold as a currency alternative and hedge against risks. Gold ended the first half with a modest gain of 7.75%. Gold stock indices underperformed gold as GDMNTR gained 5.29% and MVGDXJTR rose 3.47%. We normally expect gold stocks to outperform gold in a rising market. The underperformance of the indices this year is likely due to:

1. Mean reversion after stellar outperformance in 2016;
2. Heavy net redemptions in the gold mining ETFs;
3. Inability of stock indices to engage in fundamental stock selection.

Support Exists for Current Price Levels

The market is now in the midst of the summer doldrums, a time when physical demand is at its lowest, trading volumes can be light, and, as we saw in late June and early July, the bears come out to play. The gold price is testing the $1,200 per ounce level for the third time this year. If $1,200 fails, then it will go on to test the $1,175 base of the uptrend that has developed over the past 18 months. Successfully holding above these price levels would be very positive technically and psychologically for the market. Fundamentally, we believe the market is well supported around current levels because:

1. Physical demand in India and China continues to improve, even though the People’s Bank of China (PBOC) has yet to buy gold in 2017. We believe the PBOC is on pause this year due to foreign exchange and debt issues in China;
2. Geopolitics in the Middle East and Korea—along with uncertainty surrounding the U.S. political climate and policy—has created a pervasive nervousness globally that benefits gold;
3. The U.S. dollar appears to be in decline. While it did not help gold in June, we expect the historically negative correlation to benefit gold in the longer term;
4. Positioning in the futures market suggests there could be more buying ahead.

To Gold’s Benefit, This Fed Rate Hiking Cycle is Likely to End in Tears

We continue to be positive on the gold price in the longer term. Based on what we see and hear every day, all of us can imagine possible black swan5 events that might propel gold much higher. When we look at the economic cycle in the U.S., we find a more compelling investment case. Our March commentary highlighted many signs of a late cycle economy. In our May commentary, we published an ominous looking chart of NYSE margin debt. Complacency is at high levels typically seen at market tops. Investors continue to pour money into ETFs, driving stock market indices to new highs, while volatility as measured by the VIX Index6 is at historic lows. Most Fed rate hiking cycles end in tears. Will this one be any different?

Gold Remains a Solid Money Alternative Given Financial Risks

Gold would likely benefit from dollar weakness if the Fed is unable to raise rates later this year. In the longer term, when the economy and markets eventually see a downturn, the risks to the financial system will probably be substantial. Historically, excessive leverage is the core cause of financial upheaval. Student loans, automotive loans, and credit card debt are each over $1 trillion now. The ”elephant in the debt room” remains sovereign debt levels that exploded higher after the last financial crisis and has been growing ever since. A shrinking economy magnifies debt problems and, with interest rates still far below normal, would likely see the Fed again resort to quantitative easing and maybe more extreme intervention, such as debt monetization. Gold as a sound money alternative can act as a hedge against such risks.

by Joe Foster, Portfolio Manager and Strategist

With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.

Important Information

1 U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc.

2 The correlation coefficient is a measure that determines the degree to which two variables’ movements are associated and will vary from -1.0 to 1.0. -1.0 indicates perfect negative correlation, and 1.0 indicates perfect positive correlation.

3 NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.

4 MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

5 Black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.

6 VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

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Gold Reacts to Dwindling Reflation Trade

Gold Reacts to Dwindling Reflation Trade

Market Review – Gold Reacts to Dwindling Reflation Trade

Weak U.S. Dollar, Economic and Political Stability Support Gold Price Recovery

The gold price changed very little in May, recovering towards the end of the month after early weakness brought on by the French presidential election and the FOMC (Federal Open Market Committee) meeting. From the first round of the French elections on April 23 to the final round on May 7, markets became increasingly convinced that the pro-EU candidate Emmanuel Macron would win the election. This pressured gold as the risk of a Marine Le Pen-led Eurozone break-up lessened. On May 3, comments by the Federal Reserve (Fed) following its May FOMC meeting convinced the market that a rate increase following the June 13 meeting would be likely. Gold hit its low for the month on May 9 at $1,214 per ounce, but was able to regain lost ground to end the month up $0.65 (0.05%) at $1,268.94 per ounce. Weakness in the U.S. dollar also added support for gold during the month. The U.S. Dollar Index (DXY)1 fell 2.1% in May and appears to have entered a bearish downtrend since reaching multi-year highs in early January. Economies in Europe and Japan have stabilized recently and the Trump administration has indicated a desire for a weaker U.S. dollar. Gold should benefit if the U.S. dollar trend seen so far in 2017 continues.

Asian Physical Gold Demand Appears Strong in 2017

Physical gold demand from India and China has also been supportive of gold prices. We believe healthy demand in March and April along with anecdotal comments from analysts suggest that 2017 is shaping up to be a much better year for gold in Asia. Last year’s liquidity squeeze caused by the currency transformation in India seems to have dissipated and people are again making gold purchases. In China, bond market turbulence associated with government efforts to rein in debt and speculation have spurred investment demand for gold.

Juniors and Mid-Tiers Underperform But Not Based on Fundamentals

Chart patterns for the gold equity indices mimicked gold bullion in May. The NYSE Arca Gold Miners Index2 (GDMNTR) gained 1.07%, while the MVIS™ Global Junior Gold Miners Index3 (MVGDXJTR) fell 3.66%. The juniors and some mid-tier gold miners have underperformed the larger producers over the past two months with no significant change in gold bullion prices. We find no fundamental reason for the underperformance, and therefore expect some mean reversion to favor the juniors in the second half of the year.

Is U.S. Equity Market Bubble Set to Burst?

Following the November presidential election the “reflation” or “Trump” trade took the markets by storm. Presumably, the belief was that pro-growth policies would ignite animal spirits in the markets that would stimulate business and prosperity. As President Trump has struggled to implement policies and his administration has been dogged by controversy, the Trump trade has unwound. Metals such as copper and iron-ore have given up much, if not all, of their post-election price gains. Gold has rebounded from its post-election losses. Interest rates have subsided and the DXY has fallen to pre-election levels. The one asset class that appears to still believe in the reflation trade is U.S. equities. As we write, the S&P 500 Index4 has reached new, all-time highs. In the past year, the likes of Apple and Tesla have posted gains of more than 50%. A chart of NYSE margin debt is worth a thousand words.

Notice the peaks at the tops of the tech (2000) and housing bubbles (2007) compared with current levels. Each of these bubbles was accompanied by strong 3% to 4% economic growth and each was preceded by a Fed tightening cycle. While the current stock market does not have the same feeling of mania seen before the tech bust, in the context of an economy that struggles to achieve 2% growth, we struggle to justify current stock market valuations – and the Fed is tightening. At the other end of the spectrum are gold stocks, fresh off of the worst bear market in their history from 2011 to 2015. A chart in our April update showed gold stock valuations below long term averages. Secular market tops and bottoms are notoriously difficult to predict, however, we believe the signs are there to make such a prediction for S&P stocks and gold stocks respectively.

Industry’s Current Growth Strategy Reflected in Portfolio’s Corporate Activity Level

Our gold fund performance received a boost in May when each of our top three junior positions became the targets of corporate activity.

Gold Road Resources (2.3% of net assets*) discovered the multi-million ounce Gruyere deposit in Western Australia in 2013. Currently under development, Gruyere is set to begin producing gold in 2018. On May 19 South Africa-based major Gold Fields (0% of net assets*) announced the purchase of a 10% stake in Gold Road at a 27% premium to the closing share price.

In 2007 Continental Gold (3.0% of net assets*) purchased Buritica, a small scale gold operation in Colombia with production that dates back to 17th century colonial times. Through exploration and drilling, Continental has identified a multi-million ounce, high-grade deposit that is scheduled to become Colombia’s first large-scale underground mining operation in 2020. On May 11 Denver-based major Newmont Mining (4.4% of net assets*) announced the purchase of a 19.9% position in Continental at a 46% premium to the closing share price.

In 2014 Integra Gold (3.0% of net assets*) bought the historic Sigma and Lamaque Mines in Quebec, Canada. From 1935 to 1985 the property produced 4.5 million ounces of gold. In 2015 Integra discovered mineralization in the Triangle deposit that the old timers missed. Triangle now has a resource of 1.8 million ounces and the company was making plans to construct a mine and expand the resource further. On May 14, Vancouver-based mid-tier Eldorado Gold (0.9% of net assets*) announced the friendly takeover of Integra at a 51% premium to the closing share price.

We were early investors in each of these gold development companies and have visited each of their properties. We increased our positions as they added value to their projects. Our conviction grows when a large gold company, with their teams of geologists and engineers, decides one of our portfolio companies is of strategic importance. We can’t remember ever seeing three of our companies receiving such attention in a single month. This is a reflection of the current growth strategy in the sector. In past cycles, large companies have been guilty of overpaying for acquisitions and destroying value. They would wait until a junior advanced a project to the point of construction. Instead, producers are now taking strategic equity stakes at an earlier stage in companies with properties they believe will develop into mines. That way, if they pull the acquisition trigger, they don’t have to pay a premium on the portion they own. Eldorado used this strategy by taking a 15% stake in Integra in 2015 at C$0.28, versus the C$1.21 they are now paying for the portion of Integra they do not own.

Acquisition activity has been subdued in the sector, while strategic positioning has become a frequent occurrence. In some cases, two producers have taken a strategic stake in the same junior developer. Not all gold properties become profitable mines and not all producers will have the same success that Eldorado has had with Integra. Gold production is no longer growing globally and many companies will face declining production in the years to come. To offset this, once the current phase of strategic positioning has run its course, we believe there will be another robust M&A cycle, possibly beginning in 2018.

1 U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc.
2 NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.
3 MVIS™ Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
4 S&P 500® Index (S&P 500) consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation).

by Joe Foster, Portfolio Manager and Strategist

With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.

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This commentary originates from VanEck Associates Corporation (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

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Frexit less likely but domestic challenges

Frexit less likely but domestic challenges

Market’s participants welcomed the lead of Macron in the first round of the French presidential elections. The euro jumped 1.3% and French equities are up 4% led by French banks. We believe the excessively high OAT-Bund yield spreads will continue to tighten gradually as we get closer to the second round of the presidential elections and the Parliamentary elections. Frexit less likely but domestic challenges

As predicted by the recent opinion polls, Macron (Centrist) and Le Pen (Far-right) won the first round with Macron ahead. The election boasts a participation rate estimated at around 77%. Macron won with almost 23.8% of the votes while Le Pen gathered 21.5%. Fillon and the Republicans were defeated with 19.9%, while far-left Mélanchon lost with 19.6%. The centrist Macron gathered 23.8%, while the Right/Far right together gathered 47.4% and the Left/Far left gathered 27.6% as of Sunday 23 April.  Despite the fact that the majority of the votes went to the right-wing parties, Republicans’ leaders have already called to vote for Macron at the second round as did President Holland leading the Socialist party, increasing the chance for Macron to win the election. The probability of Macron winning the elections now stands at 62% according to the latest polls. According to Ipsos, 48% of Fillon’s voters will vote for Macron in the second round as well as 62% of Melanchon’s voters and 79% of Socialist Hamon’s voters. Only a minority of far-Left Melanchon’s voters (9%) – sensible to the protectionist economic programme of the far-Right – indicated to switch their votes to Le Pen’s, and only 33% of voters of Fillon – sensible to the security programme of the far-Right – are likely to vote for Le Pen in the second round.

Market’s participants welcomed the news. The French OAT- German Bund yield spreads tighten by 16bps as market’s pricing as Macron winning the elections looks likely with many French political leaders now supporting him in an effort to block the Far-right Le Pen. The euro jumped by 1.26% this morning against the US dollar to 1.0863 and French CAC stocks gained 4% and French banks climbed by 8% in average in the early session, while defensive assets dropped. Gold price declined 1% to US$1271 this morning, while 10-yr Treasury yields rose from 14bps to 2.3%.

After the second round of the presidential elections, the next decisive step for France will be to elect the Parliament in a month and a half from now. While it is almost certain that Marine Le Pen will not get a majority, it is still unclear how Macron will without the help of both the Socialist and Republicans groups. The uncertainty around the ability of Macron to gain a majority of seats in the Parliament to pass on his reforms will likely continue to weigh on the French-German government bond spreads in the next six weeks.

Morgane Delledonne, Fixed Income Strategist at ETF Securities

Morgane Delledonne joined ETF Securities as Fixed Income Strategist in 2016. Morgane has an extensive experience in Monetary policy, Fixed Income Markets and Macroeconomics gained at the French Treasury’s Office in Washington DC and most recently in her role as Macroeconomist and Strategist at Pictet&Cie in Geneva. Morgane holds a Bachelor of Applied Mathematics from the University of Nice Sophia Antipolis (France), a Master of Economics and Finance Engineering and a Master of Economic Diagnosis from the University of Paris Dauphine (France).

Strong PMIs support silver prices

Silver

Strong PMIs support silver prices

A combination of higher inflation, a weakening US dollar (in first half of year) and improving manufacturing growth is likely to see silver prices trade higher to US$21/oz in 2017. Yesterday’s release of the Global Manufacturing PMI at 52.7 (above the long-term average of 51.4 and sitting at a 34-month high) indicates manufacturing activity will continue to pick up this year. Strong PMIs support silver prices.

In line with our revised gold price forecast (see Gold outlook 2017: further upside likely), we have updated our silver outlook. We adopt the simple model described in Gold and silver: similar, but different. We assume that the gold price will reach US$1300/oz by mid-year and then falls to US$1230/oz by year end.

We expect COMEX silver inventory to fall after reaching decade high in December 2016. By the end of 2017 we expect inventory to be back to the levels we saw at the beginning of 2016 (17% decline).

We believe global PMI manufacturing will continue to improve, although pace of growth will slow as we approach a 6-year high of 55 at the year-end.

Mining capital expenditure has continued to slide. We factor an 18-month lag to this input into our model reflecting the time it takes forgone investment to bite into supply. Silver has been in a supply deficit for the past 11 years and further decline in mining investment is likely to see that deficit continue.

Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).