The price of gold had its first down week since early June, ending a spectacular nine-week rally, the likes of which we haven’t seen since 2006. The yellow metal briefly fell below ,900 an ounce on Wednesday as stocks neared their all-time closing high and the 10-year Treasury yield jumped on record supply. Wednesday’s billion auction of 10-year government bonds was the largest in U.S. history. As I shared with you last month, gold was looking overbought at more than two standard deviations, so a short-term correction was to be expected. It’s important to keep in mind, though, that the metal’s long-term drivers remain intact. We have unprecedented monetary and fiscal stimulus, with more potentially on the way. There’s still trillions of dollars’ worth of global government debt
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The price of gold had its first down week since early June, ending a spectacular nine-week rally, the likes of which we haven’t seen since 2006. The yellow metal briefly fell below $1,900 an ounce on Wednesday as stocks neared their all-time closing high and the 10-year Treasury yield jumped on record supply. Wednesday’s $38 billion auction of 10-year government bonds was the largest in U.S. history.
As I shared with you last month, gold was looking overbought at more than two standard deviations, so a short-term correction was to be expected.
It’s important to keep in mind, though, that the metal’s long-term drivers remain intact. We have unprecedented monetary and fiscal stimulus, with more potentially on the way. There’s still trillions of dollars’ worth of global government debt trading with a negative yield.
Despite the correction, gold continues to trade in a golden cross. That’s when the average price for the past 50 trading days is above the average price for the past 200 trading days, and it’s typically seen as a bullish signal. The current golden cross has been in place for more than 18 months now.
To learn more about the golden cross, watch the video below. Be sure to wait until the very end of the video so you can subscribe to our channel. You can also go directly to our YouTube channel and subscribe by clicking here.
Where’s the Inflation?
I believe the one factor that’s missing from this bull run is inflation. Since the financial crisis, we really haven’t seen a significant change in consumer prices, if we’re using the Bureau of Labor Statistics’ (BLS) gauge.
We may be on the verge of a new inflationary period, however, based on the latest report by the BLS. On a month-over-month basis, core inflation—that’s inflation on all items excluding volatile food and energy prices—rose 0.6 percent in July. That may not sound like much, but it’s the biggest such increase since 1991.
According to the bureau, the monthly change was led by a sharp rise in auto insurance prices. Other increases were seen in shelter, communication, medical care and used cars and trucks.
Historically, inflation has been constructive for the gold price. As the purchasing power of the dollar falls, savers and investors may seek other, more reliable stores of value, including the yellow metal.
Wheaton Precious Reports Record Revenue
If you remember, we accurately called the market bottom in a March YouTube video, using our own U.S. Global Sentiment Indicator, which tracks 126 commodities, emerging market equity indices and other assets. The indicator fell to an all-time low on March 18, flashing a strong buy signal. Interestingly, we shot the video on the last day we were in the office before making the decision to work from home.
In case you missed it, you can watch the video below.
Around the same time in mid-March, I also predicted that precious metal mining companies would see some very attractive revenue and cash flow generation in the coming months due to higher metal prices.
Not all explorers and producers in the investable universe have reported second-quarter earnings yet, but those that have are sharing strong results. Royalty firm Franco-Nevada reported $91.8 million in net income, an increase of 43 percent from the same quarter a year earlier, on revenue of $195.4 million. Franco received a Buy rating from Raymond James following the earnings report, with analyst Brian MacArthur writing that the company “has a strong balance sheet to finance potential future deals and support its dividend, which has increased every year.” The company continues to be debt-free.
Fellow royalty and streaming company Wheaton Precious Metals also had a blowout quarter. The company reported $105.8 million in net income, substantially beating Wall Street estimates of around $80 million. Revenue also beat for the quarter, and in fact, Wheaton generated record revenue for the first half of the year. Total revenue was more than $503 million, an increased of 21 percent over the same six-month period in 2019.
During the earnings call, Wheaton President and CEO Randy Smallwood expressed optimism in the company’s growth prospects, the pandemic notwithstanding.
“Given the bullish precious metals markets, the strength of our business model and our high-quality portfolio of assets, we remain confident that we can continue to create sustainable value for our stakeholders. Not only that, but we remain optimistic that we will be able to continue growing the company and add additional production from long-life assets producing in the lowest half of their respect cost curves,” Randy said.
Improved China PMI Lifts Oil
Crude oil hit a post-pandemic high this week, rising to nearly $43 a barrel on Wednesday as domestic crude supply fell for a third straight week. Consumption has also improved in China, where manufacturing activity continues to expand following countrywide lockdowns. The official China manufacturing purchasing manager’s index (PMI) ticked up to 51.1 in July, representing the fifth straight month the gauge has been above the 50.0-line separating expansion from contraction. The private Caixin/Markit PMI, meanwhile, came in even higher at 52.8.
As I’ve pointed out many times before, PMI is a forward-looking indicator that can help investors get a sense of where commodity prices might be headed one to six months down the road. That’s because one of the things PMI looks at is new orders. If factories are receiving a wave of new orders for, say, automobiles, you can reasonably expect that they will need to consume more energy to run their operations, not to mention use more metals and other raw materials.
All of this activity is supportive of commodity prices—oil’s especially, based on China’s PMI data above.
Our own research has found that when the JPMorgan Global Manufacturing PMI crossed above its three-month moving average, materials, energy, copper and crude oil prices were higher on average three months later.
I explain the relationship between PMI and commodity prices further in the following YouTube video.
Ethereum and HIVE Continue to Trade in Tandem
On a final note, cryptocurrencies have been on fire the past 30 days. Ethereum, the world’s second-largest digital coin after bitcoin, has skyrocketed 83.5 percent since July 14 and 304.4 percent since its 52-week low on March 16. Today it was trading safely above $400 for the first time in two years.
This has sent Ethereum transaction fees to an all-time high. The average fee to send and receive the digital currency stood at around $6.45 on August 13, well above the 12-month average of $0.38.
Shares of HIVE Blockchain Technologies, the world’s first publicly traded crypto miner, traded up on Friday and were on track to notch its second straight month of positive gains, after rising 51 percent in July. As I shared with you last week, HIVE and Ethereum have historically traded in tandem. For the two-year period, the two have a moderately strong correlation coefficient of 0.56. A coefficient of 1 means two assets invariably trade in the same direction at the same time while a coefficient of -1 means that they have a negative relationship and trade in opposite directions at the same time.
I’m sure you’ve noticed we ramped up our educational video content. To receive an update each time we publish a new video, subscribe to our YouTube channel by clicking here. Happy Investing!
This week spot gold closed at $1,945.12, down $90.43 per ounce, or 4.44 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 5.90 percent. The S&P/TSX Venture Index came in off just 0.31 percent. The U.S. Trade-Weighted Dollar fell 0.37 percent.
|Aug-11||Germany ZEW Survey Expectations||55.8||71.5||59.3|
|Aug-11||Germany ZEW Survey Current Situation||-69.5||-81.3||-80.9|
|Aug-11||PPI Final Demand YoY||-0.7%||-0.4%||-0.8%|
|Aug-13||Germany CPI YoY||-0.1%||-0.1%||-0.1%|
|Aug-13||Initial Jobless Claims||1100k||963k||1191k|
|Aug-13||China Retail Sales YoY||0.1%||-1.1%||-1.8%|
|Aug-19||Eurozone CPI Core YoY||1.2%||—||1.2%|
|Aug-20||Initial Jobless Claims||925k||—||963k|
- The best performing precious metal for the week was platinum, but still down 2.30 percent as hedge funds boosted their net long positions. Although a rocky week for gold, it rose as much as 2.6 percent on Thursday after the U.S. dollar weakened as stimulus negotiation stalled. Ray Dalio’s Bridgewater Associates invested more than $400 million in gold in the second quarter, according to a regulatory filing. The firm piled into the iShares Gold Trust and the SPDR Gold Trust – two of the largest gold-backed ETFs.
- Barrick Gold boosted its quarterly cash dividend by 14 percent to 8 cents per share. The company said in its second quarter earnings statement that “the dividend increase is sustainable and reflects the ongoing robust performance of our operations.” In afterhours trading on Friday, Barrick Gold was up 5 percent as Warren Buffett’s Berkshire Hathaway disclosed in a 13F filing that it had accumulated 20.9 million shares in the recent quarter. Newcrest Mining reported a 34 percent rise in full-year profit. CEO Sandeep Biswas said the miner is well-placed to consider further acquisitions due to its strong balance sheet and rising gold prices.
- The S&P 500-to-New York Gold Futures ratio could be telling us something about where gold is headed. As you can see in the chart below, there have been several multi-year cycles where gold and stocks trade leadership positions. The ratio is now falling after rising from 2010 to 2019, leaving the door open for a possible big gold run where it beats stocks.
- The worst performing precious metal for the week was silver, down 6.55 percent as investors redeemed money from silver bullion ETFs for the past five days. Gold bullion had its first weekly loss since June. Gold fell more than $100 on Tuesday and dove below $1,900 an ounce briefly on Wednesday. Bullion took a sharp downward turn after a sudden rise in U.S. bond yields. Gold dropped as much as 5.7 percent on Tuesday – it’s biggest one-day loss in seven years.
- Investors trimmed gold positions after gold soared above $2,000 an ounce. The SPDR Gold Shares ETF saw $382 million in outflows last Friday as investors weighed a mixed economic outlook.
- Goldman Sachs closed its long silver trade after a 50 percent monthly surge. Analysts said in a note that “with gold currently still below $2,000 an ounce, the increase in silver was much faster than we anticipated, and we think that the near-term risk return trade-off for silver has diminished.” Bloomberg notes that the bank is still bullish on precious metals in the medium term.
- Lu Jun, founder of private fund firm Shanghai Congrong Investment Management, whose macro fund has beaten 96 percent of its peers this year, said he is avoiding aggressive equity bets and will focus on gold-related assets. In a Bloomberg interview, Lu said there is still huge upside potential for gold prices and they “might hit $5,000 per ounce on a five-year horizon.” Due to rapid money printing, Lu is bullish on gold and said gold-related assets account for the biggest weight in his portfolio.
- Many argue that gold prices are influenced by real rates, but CrossBorder Capital argues that gold is driven by liquidity. The advisory firm said in a note that “the relationship between liquidity and gold is statistically robust and simply states that a 10 percent rise in U.S. dollar liquidity leads to a 12 percent change in the level of gold prices, some three months later.” Central banks continue to print money, which is increasing liquidity at a rapid rate. Bloomberg notes that CrossBorder estimates gold could add a further 15 percent and test $3,000 an ounce by later 2021.
- Silver’s turbulent week drove the biggest discount since 2008 to the iShares Silver Trust ETF – the world’s biggest ETF tracking the metal. The fund fell 14 percent on Tuesday along with silver spot prices, but the ETF actually tracks the LBMA silver price, which is calculated once a day at an auction. Bloomberg notes that the result was an 11 percent discount between the fund and its underlying holdings, with the fund selling off more quickly. According to Mizuho International, this demonstrates that ETFs can provide a better sense of price than the less-liquid precious metals they track.
- Gold’s rapid drop this week could turn some investors off. Edward Meir, analyst at ED&F Man Capital Markets, told Bloomberg in an interview “the extent of this selloff was so severe that I think it’s caused jitteriness about longs getting back in so quickly.” This week’s price action is a reminder for investors about gold’s volatility.
- U.S. retail sales in July increased less than expected. Sales rose 1.2 percent, below forecasts of 1.9 percent, and far less than the 8.4 percent advance in June. Kitco News notes that coronavirus infections continue to spread across the country, forcing new lockdowns or pausing reopenings. Although new jobless claims hit the lowest since the pandemic began, there are still at least 31.1 million people on unemployment.
- The resilience of the consumer is to be tested with certain Covid-19 government relief programs not being renewed for the unemployed yet.
- The major market indices finished mostly up this week. The Dow Jones Industrial Average gained 1.99 percent. The S&P 500 Stock Index rose 0.66 percent, while the Nasdaq Composite fell 0.80 percent. The Russell 2000 small capitalization index gained 2.03 percent this week.
- The Hang Seng Composite lost 0.58 percent this week; while Taiwan was down 0.91 percent and the KOSPI rose 2.77 percent.
- The 10-year Treasury bond yield rose 17 basis points to 0.71 percent.