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 $1,093.4 down $2.38 per ounce (0.22%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 2.65%. The U.S. Trade-Weighted Dollar Index rose 0.32% for the week.
Gold Market Strengths
India’s gold imports shot up by about 61 percent to 155 tons in the April-May period due to weak prices globally and the easing of restrictions by the Reserve Bank.
Billionaire hedge fund manager John Paulson, one of the world’s most influential gold investors, said that the metal is now at an appropriate price level, following last week’s rout that dragged prices to five-year lows. Paulson has retained a 10 million share stake, now worth about $1 billion, in the SPDR Gold Shares Trust, which tracks the price of gold.
Sales of gold coins and minted bars jumped 65 percent in July from the previous month at Australia’s Perth Mint. South Korea is on course to buy a record amount of gold in 2015. In contrast to the weak demand in top gold buyers like China and India, South Koreans are on target to buy 1 trillion won ($860 million) in bullion for the first time this year, based on first-half sales. South Korea accounted for just 17 tons of gold demand in 2014 and would account for 23 tons by year end if buying keeps pace.
Gold Market Weaknesses
The week started with money managers staying net-short on gold for a second week. Gold finished the week with a seventh consecutive weekly decline, marking its worst run in 11 years in reaction to the U.S. payrolls report that provided strong supporting evidence for the Federal Reserve to raise interest rates. Additionally, Morgan Stanley said investment buying for gold will keep dropping through 2018, however, these forecast are typically predicated on expectations that other investments will be rising in value.
Platinum traded near a six-year low and palladium reached the lowest since 2012 on speculation that supplies are ample amid slowing demand from China.
The two biggest unions in South Africa’s gold industry rejected a pay-increase proposal by the country’s largest producers. This could put further pressure on these companies’ margins.
Gold Market Opportunities
While the dislocation between demand for physical gold and the price of paper gold has made headlines recently, something happened at the CME recently that may be the most important development yet. Back in 2013 the gold held in the newest Comex vault plunged by nearly 2 million ounces in six months. This sent the gold coverage ratio soaring from under 20 to 112. This means that the paper claims on physical gold available for delivery was 112 times greater than the physical gold that could be delivered at any given moment by the exchange. The latest Comex gold vault depository update, covered by ZeroHedge, revealed that the gold coverage ratio reached a whopping 124, an all-time record high. After this story broke, J.P. Morgan moved gold from its available account into the registered category, boosting registered ounces by 78 percent.
Gold’s tumble to the lowest level since 2010 promises to prolong an M&A boom that’s seen transactions at a three-year high as weaker prices slash asset valuations. Deals valued at $9.6 billion were proposed or completed in the six months to June 30, up 7 percent on the previous half. In addition, Zijin Mining Group, the world’s biggest gold producer by market value, said it will press ahead with mine acquisitions to improve its portfolio quality.
Klondex Mines provided an update on its recent drill results. The drilling extended the four known mineralized veins by a collective 426.7 meters laterally and 182.8 meters vertically in the West Zone. Additionally, new parallel mineralized structures were intercepted 152.4 meters west of the Karen vein or 167.6 meters west of the underground workings. These results continue to demonstrate that the project is significantly under drilled. Klondex is up 51 percent year-to-date, while the GDM Index is down 27 percent.
Gold Market Threats
Hedge fund losses from the commodity slump are sparking investor exodus. Cargill, the world’s largest grain trader, decided to liquidate its hedge fund following diminishing investor demand last month. Additionally, the amount of money under management by hedge funds specializing in commodities stands at $24 billion, 15 percent below the peak three years ago.
Goldman Sachs reiterated a forecast that gold prices may drop below $1,000 per ounce.
According to Mohammed El-Erian, the situation in gold is unlikely to change soon but it need not be terminal. A shift would probably require a broader normalization of financial markets, including a reduction in the direct and indirect role of central banks in determining asset prices and their correlations. Basically, El-Erian is saying that investing is rigged and will continue to be until central banks stop manipulating the markets. Only then will gold and other assets normalize to their true market value.