Gold

Gold bears have had quite a ride since the start of this year. The price spiked to $1,286 per ounce last week, a rise of 11% since the end of last year as this chart courtesy of the Financial Times shows.

Gold in 2017

Source: Financial Times

Despite a gradually improving global economic picture, geopolitical tensions have increased in recent months first with Syria and more recently with President Donald Trump’s announcement that he was prepared to take military action in North Korea.

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In Europe, investors looking to protect themselves against the political risk associated with the first round of the French presidential elections where the fear of a shock victory by the far right leader Marine Le Pen was considered a distinct possibility. During this same period, the U.S. dollar has weakened somewhat in value and with gold inversely correlated to the currency, as the dollar falls gold, and other commodity prices, rise.

Well, what a difference a week makes. North Korea has shown itself to be less capable and in the face of a tougher stance from America, less belligerent than during previous bouts of posturing.

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In the French elections, the least bad option, Emmanuel Macron, has emerged victorious from the first round over Marine Le Pen with nearly all observers expecting he will win through in the second round of voting on May 7. Later this week we should hear President Trump’s tax policies which are widely expected to include substantial reductions in personal and corporate tax rates. On the back of solid U.S. and global economic growth, such inflationary fiscal stimulus will only hasten further U.S. Federal Reserve rate increases. Not surprisingly, Goldman Sachs is not alone in predicting further weakness in the gold price, which weakened promptly on the news of the French elections and is targeted by Goldman to fall to $1,200 per ounce this summer. While not a universal truth, Goldman Sachs predictions do tend do have an element of being self-fulfilling simply because so many investors take their advice into consideration when making investment decisions.

Gold Bears

These gold bears haven’t had as big a run as their metals brethren. Source: Haribo

Of course, there remain counter arguments as to why the gold price may yet rise. Trump’s presidential decrees are easier to make than getting legislature onto the statute book. Proclamations this week over the tax reduction will likely meet a more favorable Republican response than there was the case with healthcare but, even so, may be much delayed or watered-down before having any impact on the economy.

Likewise, U.S. growth could slow reducing the impetus for the Fed to deliver on its three expected rate increases this year. The Fed has frequently undershot rate rise expectations over recent years. Finally, our friend in Pyongyang has the ability, and no doubt inclination, to still do something stupid despite pressure being brought to bear to back down by his Chinese bankers. On balance, though, gold bears have probably had as good run this year as they are likely to get and profit-taking is now inevitable for all but long-term holders of the yellow metal.

The launch of the London Metal Exchange‘s new precious metals contracts will be delayed until July 10, more than a month later than previously announced, it said on Monday.

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The new gold and silver contracts, a mix of daily and monthly contracts designed to enable industrial users to hedge specific dates, were due to go live in early June.

Lighthizer Clears Committee for Confirmation as US Trade Rep

President Donald Trump’s nominee for U.S. trade representative cleared a Senate committee on Tuesday, bringing the administration closely to enacting its full trade policy.

Washington lawyer Robert Lighthizer’s nomination cleared the Senate Finance Committee 26-0. Lighthizer is seen as an ally of the manufacturing industries. The panel also voted to approve a legal waiver for Lighthizer from a 1995 law that prohibits people who did work on behalf of foreign governments from serving as the top U.S. trade negotiator.

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“Bob Lighthizer understands the issues that the U.S. steel industry faces today and we are certain he will make an outstanding United States Trade Representative (USTR),” said Thomas Gibson, president and CEO of the American Iron & Steel Institute, the largest trade group of North American steelmakers. “We thank Senator Hatch and the other members of the Senate Finance Committee for holding an executive session to progress Bob’s nomination. American manufacturers need a qualified USTR and we urge the Senate to promptly confirm Bob Lighthizer.”

Lighthizer’s confirmation now moves on to the full Senate.

Our monthly Global Precious Metals MMI dipped down a point in April from last month, losing 1.2% to end up at 83.

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Ultimately, most gold, silver, platinum and palladium price points from the U.S., China, Japan and India dropped off for the month, which led to the sub-index’s overall decline — but there was one price point that decided to blaze its own trail upward.

The U.S. palladium bar price rose 3.4% over the past month, the third straight month of increases on the MetalMiner IndX.

What’s Going on with Palladium?

Well, automotive sector demand for palladium, at least on a spot or short-term basis, would be a hard case to make.

As my colleague, Jeff Yoders, reported earlier this week, U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam.

Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

For example, Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

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According to a recent Seeking Alpha article, “going into 2017 the market was considering limited supply to be the primary factor supporting palladium prices,” with limited sector growth expected from the U.S. and European markets, and China being the only auto market to be counted on for buoyed sales.

The above has generally held true, while seasonality and investor interest in ETFs seemed to have been playing into palladium’s rise. This could well be the high point for palladium prices this first half of the year.

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The Architecture Billings Index returned to growth mode in February, after a weak showing in January. An economic indicator of construction activity, the ABI reflects an approximate nine-to-12 month lead time between architecture billings and construction spending.

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The American Institute of Architects (AIA) reported the February ABI score was 50.7, up from a score of 49.5 in the previous month. This score reflects a minor increase in design services (any score above 50 indicates an increase in billings).

ICE Delays London Gold Price Benchmark

Intercontinental Exchange (ICE) has delayed the launch of clearing for London’s benchmark gold price because not all participants in the auction will be ready, two sources involved in the process told Reuters on Tuesday. The delay could weaken its bid to become the dominant exchange in London’s $5 trillion-a-year bullion market, sources say.

 

Our March price trends report, which analyzes the entire month of February’s price data from the MetalMiner IndX, shows robust price increases in metals markets that are still running with the bulls.

March Price Trends

Our Stainless MMI led the pack, increasing 6.8%, but the copper, raw steels, aluminum and rare earths sub-indexes all showed strong gains, as well.

One area of concern this month is that oil prices have fallen back below $50 per barrel as U.S.
shale producers beat expectations by adding 8.2 million barrels to existing reserves. Low oil
prices would benefit metals producers by keeping energy and transportation costs lower, but
they also may drag down other commodities with them.

We don’t usually see investment metals such as platinum and gold increasing at the same time
as base metals, either, but positive sentiment about the economy had both increasing this month. So, until we see anything that points otherwise, a rising tide is still lifting all the (metals) boats.

The World Platinum Investment Council‘s bullishness on platinum as a key investment and industrial asset, which we reported on last fall in an interview with the Council’s Director of Research Trevor Raymond, seems to be bearing fruit as we approach the end of Q1.

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Platinum bar prices and a couple other precious price points led MetalMiner’s Global Precious Metals MMI to rise 2.4% for March 2017, landing at a value of 84.

Global Precious MMIIndeed, the U.S. platinum bar price, up by nearly 3% this month, has been on an upward trajectory for the past three months, starting the month out above the $1,000-per-ounce level for the first time since October 2016.

A Focus on Platinum

Worries over supply shortages of the namesake of platinum group metals (PGMs) are still behind the investment opportunities that the WPIC foresees — so much so that the Council is pushing new initiatives on two separate global fronts.

Although holdings of platinum-backed exchange-traded funds (ETFs) fell to their lowest since mid-2013 last October, Reuters reported that WPIC “plans to launch an ETF in China, the world’s biggest consumer of the precious metal, and a coin-based fund in Europe in 2017,” according to an executive of the council.

“We are working on two deals in China for investment products. (An) ETF and retail platinum bars with a big state-run enterprise,” Marcus Grubb, director of market development at WPIC, told Reuters. The ETF itself was formed by leading platinum producers to develop investor demand for the metal, according to the news service.

Grubb told Reuters that India’s platinum jewelry sales are rising by 25-30% a year. The PGM’s star has been rising on the subcontinent, with some questioning whether it will overtake gold as the go-to in jewelry demand in India (which is the world’s second-biggest gold consumer, so not likely anytime soon…but still).

The council will also launch a $50 million coin-based platinum fund in Europe, he told Reuters.

Auto Market Fine…For Now

It helps that car sales still appear to be cruising along, even if at, well, only cruising speeds. Even though U.S. car sales dropped 1.1% in February over the same month last year, total vehicle sales in China, including trucks and buses, came in 0.2% higher year-on-year to 2.5 million units.

But, as my colleague Jeff Yoders reported, China is also entering the planned final year of a major government automotive purchase rebate which could affect sales as the incentive winds down. What this will mean for platinum use in vehicles remains to be seen.

The Supply Game: Latest Producer Moves

Back to the supply side. Shortage concerns have recently caused companies such as South Africa’s Northam Platinum Ltd. to buy up more platinum assets including mines, in this case from Glencore, Reuters reports.

Glencore’s Eland mine, containing some 21.3 million ounces of the metal, play into the Northam’s long-term production strategy — which, of course, banks on continued demand and higher platinum pricing.

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However, Northam said that the global economic outlook and low-dollar metal prices “remain a concern for them, at a time when it faces increasing power and labor costs,” according to Reuters. As of this writing, $1 = 13.08 rand, worse than last month.

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Gold prices have gained 9% this year, regaining much of the losses seen after the U.S. presidential election.

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A stronger dollar and expectations for economic growth drove investors out of the safe-haven asset. What’s now sending investors back into gold? and, is this gold rally the beginning of gold’s revival or just a dead cat bounce?

Buying The Dip

Gold rises in 2017. Source:MetalMIner analysis of @stockcharts.com data.

Although a 9% increase might look impressive, it really isn’t. Gold previously lost $180 per ounce in less than two months. After such a big slump it’s normal see a price rebound since many investors will see the significant dip as an opportunity to buy gold at a discount.

To me, this doesn’t mean that gold’s underlying fundamentals have improved. Prices still have yet to test stiff resistance near $1,300 per ounce. This rally could lose steam in March.

The US Dollar

The US Dollar Index since March 2016. Source: MetalMiner analysis of @stockcharts.com data.

Perhaps, the single factor contributing most to this year’s gold rally is a weaker dollar. Weakness in the dollar also comes because the currency rose very fast in the last quarter of 2016. In addition, President DonaldTrump made comments that he desires a weaker dollar and that has also weighed down the currency.

Last week, Federal Reserve officials said they plan to raise rates “fairly soon,” but they left investors doubting that the central bank will act at its March meeting. The Fed raised interest rates in December and cited plans to raise rates as many as three times in 2017. Higher rates tend to weigh on gold, since the precious metal becomes less less attractive compared with yield-bearing assets when borrowing costs rise.

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This month the dollar seems to be finding some support. We’ll have to wait and see if the currency can resume its bull market run, which would be quite bearish for gold prices.

Stock Markets

The S&P 500 hits all-time highs. Source: @Stockcharts.com.

Trump has frequently told U.S. citizens he remains committed on both tax reform and regulatory cuts since entering the White House, which has created optimism among investors. We already presented the case for a bull stock market back in January.

A Trump administration for the next four years might be just what the doctor prescribed to keep this aging bull stock market going, even with seven-plus years of gains behind its back. At least that’s what it looks like thus far. U.S. stock indexes are trading at all-time highs, which is not helping gold as a safe haven.

What This Means For Metal Buyers

The recent strength in gold prices is something to keep an eye on. However, keep in mind that this rally might just be a dead cat bounce. A rising stock market, a healthy U.S. dollar and gold prices meeting resistance are factors that could keep a lid on gold’s rally.

The 2010 Dodd-Frank law explicitly gives the President of the United States authority to order the U.S. Securities and Exchange Commission to temporarily suspend or revise the Conflict Minerals rule included in the Dodd-Frank banking reform law for two years if it is “in the national security interest of the U.S.”

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Last week we reported that the Trump administration was working on a draft executive order to, indeed, suspend the rule which requires reporting of supply chains to enforce a ban on tin, tantalum, tungsten and gold from the Democratic Republic of the Congo. It’s backed by human-rights groups but many businesses say the rule, as is, requires a swath of industries to investigate whether their products contain the metals far down their supply chains. Compliance has already been hit or miss for the rule. Last year, 65% of companies said they still could not make determinations about their full supply chains.

Reuters reported that the leaked draft memo, which its reporters saw, said that the Secretary of State and Secretary of the Treasury were tasked with proposing a plan for addressing human rights violations and the funding of armed groups in the Congo and were also required toreport back within 180 days.

The memo also lays out a justification for suspending the rule, saying that while it has helped discourage some American companies from purchasing materials in the region, it has also led to “some job loss.”

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Of course, this is only a draft and it could significantly change before any actual executive order is drafted. The one thing that is sure, however, is that thanks to the wording of the Dodd-Frank law, President Donal Trump (R.-N.Y) does, indeed, have the power to suspend the rule for up to two years.

The Trump administration is reportedly considering an executive order that would suspend the conflict minerals rule of the Dodd-Frank banking regulation bill.

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The conflict mineral rule requires reporting of supply chains to enforce a ban on tin, tantalum, tungsten and gold from the Democratic Republic of the Congo. It’s backed by human-rights groups but many businesses say the rule, as is, requires a swath of industries to investigate whether their products contain metals that could have been sold by armed groups so far down their supply chains that it’s impossible to tell where it came from. Reporting has been spotty even under the current rules.

The proposed executive action, drafted last week and reviewed Wednesday by The Wall Street Journal, would suspend the conflict-minerals rule for two years. Business groups have fought the rule in court, saying its requirements are costly and burdensome.

US Sells Crude Oil From Strategic Reserve

10 million barrels of crude from the U.S.’s strategic reserve are scheduled to be sold later this month, the Department of Energy said.

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The shipment is part of a total 25 million barrels, to be sold over a period of three years, as per the 21st Century Cures Act, signed in December last year.

India is the world’s second-largest importer of gold after China.

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India’s gold import bill was up 12% in 2015 reaching $35 billion. 2016 final numbers are expected to come in at about the same rate, although a sharp drop in demand during December — said to be due to Prime Minister Narendra Modi’s move to scrap 500- and 1,000-rupee banknotes as a “demonetization” crackdown on corruption and tax evasion — is said to have hit the largely cash-facilitated gold jewellery market hard in the short term.

Even so, Gold imports are a considerable burden on India’s balance of payments coming second only to oil in the demand it puts on India’s foreign exchange reserves. India imports 900 to 1,000 metric tons per year, but local gold output is just 2 to 3 mt per year. In the same way that the Indian government has encouraged onshore and offshore oil exploration, you would expect indigenous gold mining would be an industry the government actively encourages.

Although India has mines that go back more than 120 years, its annual gold production is miniscule. According to an article in the Hindu times that could be about to change. The Kolar gold field was forced to close in 2001 due to mounting losses at operator Bharat Gold. The state-owned company had been mining the Kolar reserves since independence in 1947 but the mines are deep — down to 3 kilometers — and Bharat was operating with outmoded technology and a large, unproductive legacy workforce. But Mineral Exploration Corp. estimates show reserves to be worth $1.17 billion in the mines, with another $880.28 million in gold-bearing deposits estimated to be left over in residual dumps from previous mining operations.

How Can India Mine More Domestic Gold?

It is debatable whether state-owned Bharat gold has the expertise to economically exploit such deep and relatively low-grade reserves, but established global miners such as Vedanta may hold more potential. In February 2016, the firm became the first private company to successfully bid for a gold mine in India — the Baghmara gold mine in Chhattisgarh — a mine with potential gold reserves of 2.7 mt of contained metal. Sure, that’s a fraction of Kolar’s 35-mt potential but a good start for a firm of Vedanta’s standing to start in India’s gold mining sector.

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India is never likely to rival South Africa, Canada or Australia as a gold miner, but that’s not the point. Any contribution to the domestic market will lessen the impact gold imports have on the country’s balance of payments. With domestic reserves estimated at over 100 mt there appears to be scope, with the right state and government backing, for miners to reduce some of those imports and create domestic employment.