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Gold Heats Up and Silver Joins the Race

Summary:
Now that gold has broken through the ,450 an ounce level, a six-high year high, the next big test is ,500. And as I’ve said before, it can do this in the blink of an eye under the right conditions. We may end up seeing those conditions emerge sooner rather than later. On Thursday, Federal Reserve Bank of New York President John Williams seemed to indicate that a rate cut could be expected later this month, saying that central bankers need to “act quickly” as economic growth cools. Although he later clarified his comment, claiming he was simply citing research and not forecasting central bank action, the price of gold jumped as much as 2 percent on the news before closing above ,440 for the first time since May 2013. Investors took some profits on Friday, knocking the price down

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Now that gold has broken through the $1,450 an ounce level, a six-high year high, the next big test is $1,500. And as I’ve said before, it can do this in the blink of an eye under the right conditions.

We may end up seeing those conditions emerge sooner rather than later.

On Thursday, Federal Reserve Bank of New York President John Williams seemed to indicate that a rate cut could be expected later this month, saying that central bankers need to “act quickly” as economic growth cools. Although he later clarified his comment, claiming he was simply citing research and not forecasting central bank action, the price of gold jumped as much as 2 percent on the news before closing above $1,440 for the first time since May 2013.

Investors took some profits on Friday, knocking the price down around 1 percent after gold started to look overbought a day earlier. The metal was up two standard deviations over the past 60 trading days, its highest level since April 2016. I would consider each pullback such as this a buying opportunity, though, because I believe the best is yet to come for the metal.

Gold Heats Up and Silver Joins the Race

Ray Dalio seems to agree. In a lengthy post on LinkedIn—Dalio’s favorite platform for getting the word out—the billionaire hedge fund manager writes that he thinks we’re on the verge of a new economic paradigm shift and that central banks’ accommodative policies, from low rates to quantitative easing (QE), are unsustainable. To hedge against this, Dalio says, “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.” Most investors are underweighted in gold, “meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset,” he writes.

A Monster Rally for Juniors

Select junior and micro-cap gold and precious metal miners also posted very strong growth over the past week, mostly on positive drilling results. In a press release dated July 15, Brixton Metals announced encouraging results at its wholly owned Thorn Gold-Copper-Silver Project in British Columbia. Gary Thompson, chairman and CEO of the Vancouver-based explorer and developer, said that Brixton “continues to unlock a mountain of value” at the property, which exhibits even greater mineralization than was previously thought.

Gold Heats Up and Silver Joins the Race

As for silver, I’m pleased to see that it’s finally playing “catch up” to gold, its price having hit a 52-week high after an incredible six straight days of gains.

Gold Heats Up and Silver Joins the Race

The Bullish Calls on Gold Continue

With gold having already broken out of its five-year trading range, is the best still yet to come? I believe it is. And I’m not alone. Read what some analysts and strategists have to say:

Alpine Macro

“The Fed is getting ready to cut interest rates, which should set in motion a multi-year bear market in the dollar,” write analysts at Alpine Macro in a research note dated June 28. A weaker U.S. dollar is one of three “key ingredients” for a bull market, according to Alpine Macro, the other two being a more accommodative Fed and rising geopolitical risks.

“The technical break above $1,400 an ounce is a positive sign,” the firm adds. “New all-time highs for gold should be seen in the coming years.”

World Gold Council (WGC)

“The prospect of lower interest rates should support gold investment demand,” the World Gold Council (WGC) says in its mid-year outlook. “Our research indicates that the gold price was higher in the 12 months following the end of a tightening cycle. Moreover, historical gold returns are more than twice their long-term average during periods of negative real rates—like the one we are likely to see later this year.”

Canadian Imperial Bank of Commerce (CIBC)

“We continue to see no signs of rate hikes on the horizon over the next several years, and historically have seen gold continue on an upward trajectory beyond the last rate cut,” writes CIBC in a note dated July 14.

The bank points out that in two previous gold bull market cycles—in the 1970s and 2000s—negative real rates were the main contributing factor.

“During the last two major periods when real rates stayed below the 2 percent level and actually ticked into negative territory, the gold price moved over 320 percent in the 1970s… and approximately 400 percent from 2004 to peak in 2011.”

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Gold Market

This week spot gold closed at $1,425.37, up $9.62 per ounce, or 0.68 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 6.94 percent. The S&P/TSX Venture Index came in up just 2.77 percent. The U.S. Trade-Weighted Dollar rose 0.33 percent.

Date Event Survey Actual Prior
Jul-16 Germany ZEW Survey Current Situation 5.0 -1.1 7.8
Jul-16 Germany ZEW Survey Expectations -22.0 -24.5 -21.1
Jul-17 Eurozone CPI Core YoY 1.1% 1.1% 1.1%
Jul-17 Housing Starts 1260k 1253k 1265k
Jul-18 Initial Jobless Claims 216k 216k 208k
Jul-24 New Home Sales 658k 626k
Jul-25 Hong Kong Exports YoY -2.3 -2.4%
Jul-25 ECB Main Refinancing Rate 0.000% 0.000%
Jul-25 Durable Goods Orders 0.8% -1.3%
Jul-25 Initial Jobless Claims 220k 216k
Jul-26 GDP Annualized QoQ 1.8% 3.1%

Strengths

  • The best performing metal this week was silver, up 6.40 percent on perhaps a paradigm shift as the investors poured $133 million into silver bullion ETFs on Wednesday, the single biggest inflow in six and a half years. The weekly Bloomberg survey of gold traders and analysts shows that most are bullish on the yellow metal as prices broke through a five-year high and touched $1,453 per ounce on Friday morning. Traders seem to be set on an interest rate cut from the Federal Reserve this month, which is helping gold, even as some better-than-expected economic data was released on Tuesday. Turkey, which often sells its gold, saw its reserves rise by $71 million this week compared to last.
  • The Perth Mint left a $45 million gold coin on display in Manhattan on Tuesday. The coin, which measures 32 inches in diameter and is almost five inches thick, weighs 2,200 pounds. Perth Mint CEO Richard Hayes says that the rise in U.S. sovereign debt has been a big and largely overlooked factor in surging gold prices, reports the Financial Review.
  • After a long spat, Acacia Mining and Barrick Gold have reached a deal for Barrick to buy the roughly 36 percent stake in Acacia that it didn’t already own, reports Bloomberg. The offer is a 24 percent premium to the company’s closing price on Thursday. Now that this dispute has been resolved, hopefully Acacia and the Tanzanian government can mend their relationship.

Weaknesses

  • The worst performing metal this week was palladium, down 2.49 percent as hedge funds cut their net bullish position, perhaps rolling some of the proceeds to silver. Gold exports from Europe’s major refining hub, Switzerland, fell a whopping 55 percent in June to the lowest since at least 2011. This is due to smaller shipments to China and India, the world’s two largest consumers of gold, on the back of higher gold prices.
  • Venezuela is defying sanctions once again and selling off its gold reserves. The troubled South American nation sold $40 million in reserves last week, nearly one ton, lowering its dollar reserves to a near three-decade low of $8.1 billion. President Maduro has sold approximately 24 tons of gold to places such as the United Arab Emirates and Turkey since April, according to Bloomberg.
  • Even as gold is soaring to multi-year highs, investments into gold-backed ETFs don’t seem to be going anywhere. Looking at the SPDR Gold Shares ETF, cumulative demand since the start of 2018 doesn’t show a big rush to own bullion yet. Additionally, investors are selling out of gold miner ETFs which have underperformed their rivals; mutual fund asset managers in the precious metal miners sector have significantly outperformed the ETF products.

Opportunities

  • In an essay posted on LinkedIn this week, billionaire investor Ray Dalio writes that he believes “it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.” Dalio adds that he sees a “paradigm shift” coming in the next few years as a huge amount of debt and non-debt liabilities come due and can’t be funded with assets. SkyBridge Capital said it is considering investing in gold for the first time since exiting in 2011 due to Fed interest rate cuts. Bloomberg published a piece this week saying that sub-zero real yields are boosting the rush into gold – since gold’s lack of yield doesn’t matter when the pile of negative-yielding bonds continues to grow. Lastly, Deutsche Bank says that should U.S. foreign exchange policy start a currency conflict, the best option is to hold gold.
  • According to a survey of central banks conducted by the World Gold Council (WGC) and YouGov, 54 percent of respondents expect global holdings of gold to climb in the next 12 months due to concerns about risks in other reserve assets. WGC said that “this year’s survey signals another healthy year of central bank gold demand” after central banks bought the most gold in 2018 since 1971.
  • Silver finally got some attention from investors this week. Bloomberg’s Eddie van der Walt writes that silver has been in gold’s shadow for eight years now and that the price ratio between the two rose above 93 this month – a level not seen since 1992. National Bank Financial analysts Don DeMarco said that when the ratio falls below 90, which it did on Tuesday, the average one-year return for silver is 22 percent and 10 percent for gold. The silver spot rose about 6.40 percent this week.  Exploration stocks and silver miners also saw exceptionally strong price performance throughout the week.

Gold Heats Up and Silver Joins the Race

Gold Heats Up and Silver Joins the Race

Threats

  • Venezuela continues to attempt to evade U.S. sanctions. According to sources familiar with the matter, Venezuela is mulling over using a Russian-operated international payments messaging systems as an alternative to SWIFT.
  • De Beers, the world’s largest diamond producer, continues to see demand fall and is cutting production. Bloomberg reports that the company plans to mine 31 million carats in 2019 – at the bottom end of a previous forecast range. Diamond sales from January to June have fallen for four consecutive years.
  • President Trump said this week that his administration will “take a look” at Peter Thiel’s allegations that Google’s work with China is “seemingly treasonous,” writes Bloomberg’s Terrance Dopp. Thiel is a board member of Facebook. More investigations into the big tech companies could spell trouble for the markets overall.

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 0.65 percent. The S&P 500 Stock Index fell 1.23 percent, while the Nasdaq Composite fell 1.18 percent. The Russell 2000 small capitalization index lost 1.41 percent this week.
  • The Hang Seng Composite gained 1.06 percent this week; while Taiwan was up 0.45 percent and the KOSPI rose 0.37 percent.
  • The 10-year Treasury bond yield fell 7 basis points to 2.047 percent.

Original article posted at http://www.usfunds.com/investor-library/investor-alert/gold-heats-up-and-silver-joins-the-race/

July 19, 2019

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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