Monday February 09, 2015 15:50
- January saw the largest inflows in gold ETFs since the summer of 2012. Part of the allure has been the fact that interest rates in many countries around the world are now negative, a consequence of central banks’ easing policies. For example, the value of outstanding European government bonds that have a negative yield is now over €1.5 trillion.
- The dollar’s strength is beginning to hurt U.S. companies and is increasingly being met with skepticism in different corners of the market. Companies such as Pfizer, Microsoft, United Technologies, Procter & Gamble, Apple and Google all mentioned the strong dollar as a hurdle in the latest reporting season. Looking at the massive net speculative dollar long positions on the InterContinental Exchange, the bull view on the dollar is arguably the most crowded trade there is across the world. Renowned investor Paul Singer from Elliott Management recently stated that his firm disagrees with the seemingly universally held belief that the U.S. is unquestionably the safe haven for the foreseeable future.
- Bank of America Merrill Lynch calculates that for 2015, $2.3 trillion will be trimmed from global nominal GDP. This would be the sixth time since 1980 that this has happened. This is another wild card the Fed will have to consider. It would be as if the economies of Brazil and the U.K. would just disappear and there is no negative feedback to U.S. markets.
Weaknesses
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- Gold futures fell on Friday as the U.S. economy added more jobs in January than forecast, signaling economic growth that may reduce pressure on the Federal Reserve to maintain low interest rates. However, there are seeming inconsistencies in the jobs report as the Bureau of Labor Statistics counted only 1,900 jobs losses in energy firms, a fraction of industry reports.
- While inflows into gold ETFs have surged in January, silver ETF flows have remained muted. The metal’s volatility has shaken investors so much that even the 10 percent rally last month failed to boost purchases of silver ETFs.
- Gold appears to be losing momentum after the best month in three years as investors pulled back on deposits into gold-backed ETFs.
Opportunities
- Gold rose in response to China’s reserve ratio cut this week. Central banks from Europe to Asia are taking action to counter slower growth and deflation. Furthermore, gold imports by India are expected to surge this year as the government has eased curbs on overseas purchases. In addition the Bank of Montreal has launched a new product backed by physical bullion stored in Canada that takes aim at the ETF market. The bank said the program will issue $500 million worth of shares to start buying gold.
- Centerra Gold and Premier Gold announced they will form a joint partnership to advance the Trans-Canada Property. This shared risk approach may be indicative of a new model to better manage development of mining properties as well as better decision making.
- A report by Bank of Montreal Private Bank shows that between 2004 and 2014, a simple portfolio divided equally between large-cap equities, U.S. Treasuries and gold delivered the same returns as an all-stock portfolio, but with just about half the risk. While investors often focus on returns during bull markets and then turn around and focus on risks only after markets have fallen, this study shows gold helps diversify extremes.
Threats
- Hardrock miners have been handed the short end of the stick in Obama’s proposed budget as provisions seek to subject miners to a royalty of not less than 5 percent of gross proceeds, increases for annual claim maintenance fees, and a new mineral leasing process.
- China’s official purchasing managers’ index (PMI) fell to 49.8 in January, a low last seen in September 2012 and below the crucial 50-level. The contraction affirms the growing unease about China’s GDP slowdown.
- UBS said that the early 2015 safe-haven gold trade has run its course and thus, gold probably won’t gain much more for the remainder of the year.
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