In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,171.82 down $18.73 per ounce (-1.57%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 3.76%. The U.S. Trade-Weighted Dollar Index gained 0.58% for the week.
Gold Market Strengths
Shanghai Gold Exchange withdrawal volume came in at 37.1 metric tonnes for the week, reaching 982.7 metric tonnes for the year. The U.K. Royal Mint announced that its Signature Gold online service will allow investors to buy part of 400-ounce bars, to be stored in its vault. Customers will be allowed to buy and sell throughout the day but cannot take physical delivery as the Mint will remain the custodian for the bars.
For the past two months, gold has traded in a fairly tight trading range, though Friday’s weak intraday price action pushed the limits of the lower band to $1,162.75, with the stronger-than-expected jobs report. The yellow metal closed nearly $10 above the lows of the day.
Although we highlighted last week that mine productivity is down 28 percent over the last decade according to McKinsey & Company, a closer look at the data shows this trend may be reversing. The overall 28-percent decline reflects a 3.5-percent drop per year. But as the chart above shows, the first portion of the decade saw a fall of 6.0 percent per year while the last four years only showed a 0.4-percent decline. In the last year for which data is presented, productivity actually rose.
Gold Market Weaknesses
Gold futures fell to an 11-week low after data on U.S. payrolls showed they climbed by the fastest rate in five months, bolstering the argument that the Federal Reserve will raise interest rates sooner rather than later. Retail sales of gold by the Perth Mint and the U.S. Mint have been declining as investors have been chasing returns in the stock market. This has also affected gold holdings in the largest gold exchange-traded fund in the U.S. Assets in the fund dropped to six-year lows, pulling the fund out of the top 10 largest ETFs in America.
Bloomberg’s survey of gold traders shows a bearish outlook for next week with 11 Bearish, five Bullish, and two Neutral, citing signs of weakening demand on the horizon.
ANZ Research has a bullish gold forecast of $1,400+ per ounce for 2016 and beyond, but in the near-term they think gold could fall as low as $1,100 per ounce, citing the potential for a strong U.S. dollar.
Gold Market Opportunities
And how do you suppose investors are prepared for the coming grand finale? Shown above is net free credit relative to the S&P 500 Index market cap and the absolute net free credit balance. As a reminder, net free credit is the free credit balances in cash and margin accounts net of the debit balances in margin accounts. Net free credit is a measure of cash available to meet margin calls. Unlike margin debt, net free credit is at an extreme reading in absolute terms and relative to market capitalization. In April, net free credit broke below the extreme lows relative to the S&P 500 market capitalization set in February 2000, just prior to March 2000 peak and bursting of the Y2K tech bubble.
This past week, Mineweb featured a two-part piece written by Anthony Hart of the Perth Mint titled “12 Reasons to Own Gold Now.” One of the 12 reasons cited is “Equity market valuations,” which is particularly pertinent at this time, considering the Fed is about to embark on ending a monetary experiment unlike any other ever attempted by a central bank. The policy of free money for investors with no risk of loss is coming to an end.
Should the market drop, triggering margin calls, investors do not have cash in their accounts and would be forced to sell stocks or get cash from other sources to meet the margin calls. This would obviously exacerbate a market selloff. That is precisely how investors are positioned for the ending of free money. They might figure they don’t need gold in their portfolio when the market could go higher.
Gold Market Threats
According to The Economic Times, the Hindu calendar will see nearly a 40-percent drop in the number of auspicious days for weddings in the second half of this year. This obviously could dent the demand for gold in terms of gold jewelry offtake. The spokesperson for the India Bullion and Jewellers Association noted demand could decline by 10 to 25 percent, depending on price levels later in the year.
Andrew Wilson, Goldman Sachs Asset Management’s chief executive in Europe, warned that the debt burden, particularly in developed countries with aging populations, is a threat to their economies. He noted we no longer have the young working populations required to sustain a debt-driven economic model in the same way we managed in the past. Governments need to consider more creative policies, such as immigration and workforce expansion in order to find ways to pay down the debt.
Mineweb reported that platinum miners betting on fuel cells to power electric cars in the future might be in for disappointment. Platinum miners have invested in research to fund new uses of platinum, and fuel cells for electric cars could be a significant new use for the metal in the future as electric cars gain more traction. However, if electric cars end up using energy stored in batteries as their power source, there won’t be a need for platinum in the production of catalytic converters, as vehicle emissions will be a thing of the past.