China’s Gold Hoard Swells
PBOC increases holdings for seventh month amid U.S. trade war
Poland has more than doubled gold assets, Russia’s also buying
Central banks are going after gold in 2019, boosting holdings as economic growth slows, trade and geopolitical tensions rise, and some authorities seek to diversify their reserves away from the dollar.
The People’s Bank of China said Monday it raised reserves for a seventh month in June, adding 10.3 tons, following the inflow of almost 74 tons in the six months through May. Last week, Poland said it more than doubled its gold assets over this year and last, becoming the top holder in central Europe.
Bullion has rallied to a six-year high in 2019 as investors bet on rate cuts by the Federal Reserve, although robust jobs figures on Friday clouded that view. Gold purchases by central banks are adding to overall demand, with Russian authorities a substantial and sustained buyer of the traditional haven.
“Aside from its attempt to diversify its holdings of dollars, owning more gold reserves is also an important strategy in China’s rise as a superpower,” Howie Lee, an economist at Oversea-Chinese Banking Corp. in Singapore, said in an email. Additions are likely to continue in coming months, according to Lee.
Last year, central banks bought 651.5 tons, 74% up on the previous year, the World Gold Council said in January. Official sector purchases could reach 700 tons this year, assuming the China trend continues and Russia at least matches 2018 volumes of about 275 tons, Citigroup Inc. said in April. Buying from central banks in the first five months of this year is 73% higher than a year earlier, with Turkey and Kazakhstan joining China and Russia as the four biggest buyers, according to data released on Monday by the WGC.
China’s recent bullion accumulation, as well as that by other central banks, has come against a backdrop of firming prices. Spot bullion traded 0.4% higher at $1,404.82 an ounce on Monday after climbing 9.1% in the second quarter.
This compares with gold’s peer of silver gaining just 1.3% over the same period, resulting in the ratio between the two metals increasing to more than 93, the widest since 1992. Central bank support for gold has been a key driver in the diverging fortunes of gold and silver, according to Ole Hansen, head of commodity strategy at Saxo Bank A/S.
The news on Poland’s increased haul last month included reference to half of its deposits being transferred to the eastern European nation from the Bank of England. This move “is likely due to the rapid increase in its holdings and the intent to build a reserve for the long term,” Hansen said, adding this reduced the need to keep its gold in the trading-market hub offered by London.
Gold hits six-year high: What does this mean for investors?
'Perfect storm' in markets
Lauren Mason @LaurenMason_IW 08 July 2019
The price of gold is set to continue its rally thanks to a "perfect storm" of dovish noises from the US Federal Reserve, a stagnating US dollar and ongoing geopolitical tensions, according to some investment professionals who are increasing their exposure to the yellow metal.
However, other multi-asset managers warn the prospect of rising US Treasury yields, or an extended truce in the US-China trade war, pose too much of a risk to continue upping gold exposure in portfolios, particularly as its spot price already surpassed $1,400 for the first time in more than six years last month.
On 20 June, gold's spot price reached the psychologically important $1,400 mark, following the US Federal Reserve's dovish policy statement the previous day, which also coincided with European Central Bank (ECB) President Mario Draghi's pledge to leave the door open for further ultra-loose monetary policy.
At the time of writing (4 July), the gold price stands at $1,425.10 and increased by 6.97% in June alone. Year-to-date, the gold price is up 10.83%, taking into consideration a two-month dip through March and April.
Given the volatile nature of the yellow metal and the fact its price has spiked so sharply over the last month, can investors expect gold to continue to rally?
Given its volatile nature and the fact its price has spiked so sharply over the last month, can investors expect gold to continue to rally?
Crunching the numbers
Research from asset management firm DWS found that, while the gold price is higher than it has been for six years, it is still more than 25% down from its 2011 peak.
Over the past ten years, however, the S&P 500 has risen by 220% excluding dividends to reach almost 3,000 index points, while the gold price has only risen by 40%.
The research team at DWS said: "It [cannot] be said that the lower gain was compensated by higher security, which is what gold owners usually look for - at least, if you measure uncertainty in volatility. The two asset classes do not differ much from each other in the long run; Lower returns with the same risk - who might want that?
"Overall, gold investors must make do with the joy of a year in which the price has risen by about 10%."
However, research from WisdomTree suggests there is further upside to come. The firm's quantitative framework - which takes into account several price drivers including changes in the US dollar basket, the Consumer Price Index and nominal yield changes on 10-year US Treasuries - has resulted in a forecast the gold price will reach $1,480 by the end of Q2 2020.
Nitesh Shah, director of research at the firm, said: "We think gold prices are likely to continue to rise, reflecting the fact gold is under-priced with Treasury yields this low and speculative positioning in the futures market quite high. Risks of policy error could send the metal even higher, and if geopolitical tensions rise, with say the trade war truce faltering, we could see even more upside for gold.
"Inflows into WisdomTree gold ETPs were over $1.05bn in H1 2019. That is the highest level of half-yearly flows since H2 2016. Most of the flows came in the past month as gold experienced a ‘perfect storm' of US Treasury yields dropping as the Fed flipped to a dovish stance, dollar appreciation abated and geopolitical tensions surged."
Mobius Capital Partners founder Mark Mobius also recently told Bloomberg that he expects gold's price to continue its climb, potentially topping $1,500 an ounce, while recommending every portfolio has at least 10% exposure to the commodity.
Ian Williams, CEO and lead manager of the HC Charteris Gold and Precious Metals fund, said a fundamental factor helping gold is the rising expectation of a new round of interest rates cuts and the resultant weakness in the US dollar.
He added: "These factors will continue to push [the gold price] higher. Although gold has also appreciated by about 9% in US dollar terms this year, it remains significantly below its US dollar peak."
Craig Brown, investment specialist for the Rathbone Multi-Asset Portfolios and Managed Portfolio Service, has increased exposure to gold across portfolios throughout 2019 via the iShares Physical Gold ETC. The funds' exposures sit at just over 2% in Enhanced Growth, just under 2.5% in Strategic Income, just under 3% in Strategic Growth, and around 5% in Total Return.
Given the volatile nature of the yellow metal and the fact its price has spiked so sharply over the last month, can investors expect gold to continue to rally?
"The yellow metal is erratic: no one can really explain why its value bounces around day to day, and because it doesn't pay any income it is both volatile and, counterintuitively, highly susceptible to inflation. The old investment adage of buying gold to protect your wealth from money-printing central banks inflating it away doesn't quite sit well with us.
"However, it has historically attracted many investors when the geopolitical landscape looks rocky or equity markets are nervous, pushing its price higher still. So, holding a small amount can be a good way to reduce the volatility of your portfolio."
Meanwhile, Nick Watson, portfolio manager on the multi-asset team at Janus Henderson Investors, added 1.5% gold exposure across portfolios in May and June as trade war rhetoric "dramatically escalated amid a backdrop of softening global economic data, weaker US labour market reports and an expected softening in the US dollar". The team then reduced its exposure - which it accesses via a physical gold ETF - back to 3% at the end of June.
"We retain the current 3% position not because we are bullish on the gold price, but because we are keen to ensure our portfolios offer sufficient diversification in the next bout of volatility," he said.
Anthony Rayner, fund manager in the multi-asset team at Miton, has also reduced the funds' gold positioning recently: "Key risks to gold are US dollar strength, rising US real yields, a less dovish US Federal Reserve and an extended truce in the trade war," he said. "As pragmatic investors, we will look to reduce further our material exposure to gold if the positive backdrop changes."
Central bank gold purchases up 73% so far this year, says WGC
8TH JULY 2019 BY: NADINE JAMES CREAMER MEDIA WRITER
Net gold purchases by central banks totalled 35.8 t in May, 27% lower month-on-month, but net purchases in the year to date, at 247.3 t, are 73% higher year-on-year, the World Gold Council (WGC) reports.
WGC market intelligence director Alistair Hewitt on Monday pointed out that central banks in several emerging markets, including Russia, China, Turkey and Kazakhstan, continued to dominate buying, with those banks being “the four biggest buyers so far” this year.
Kazakhstan’s central bank has bought in excess of 25 t of gold over the last six years, peaking last year at 50.6 t. To date this year, the bank has bought 20.5 t of gold.
To date this year, China has bought 63.8 t of gold, while Turkey’s central bank, which started buying gold outright in May 2017, bought about 49.3 t of gold, so far this year.
Russia, meanwhile, has bought 77.1 t of gold in the year to date.
Other central banks that have increased their gold purchases since 2016 include Uzbekistan, Serbia, the Kyrgyz Republic, India, Hungary, Greece, Egypt, Colombia and Belarus.
Not All Gold Bugs Wear Tinfoil Hats
The precious metal is the closest thing that we have these days to an objective store of value.
By Jared Dillian July 9, 2019, 2:00 AM PDT
Gold has had some reputational issues since reaching a record high in 2011. The thesis at the time was that a massive expansion of the money supply via the Federal Reserve’s quantitative easing program would spark hyper-inflation, making hard assets more attractive than financial assets. Hyper-inflation never came to pass, which helps to explain why the price of gold tumbled almost 50% over the following four years.
We still don’t have very much inflation, and yet there is renewed interest in gold with prices reaching their highest since early 2013 at about $1,440 an ounce. There are a lot of reasons to like gold. One is that gold tracks fairly closely with budget deficits. The highs of 2009-2011 roughly corresponded with the large deficits that reached 10% of GDP during the Obama administration, which included the stimulus spending during the Great Recession and a sharp depreciation in the value of the dollar.
This time there is a sense that the deficit problem is large and intractable. The Congressional Budget Office forecasts the deficit will more than doubleto 8.7% of GDP by 2049. Also, there is open discussion of things such as modern monetary theory, or MMT, which would be about the most gold-bullish development imaginable.
Gold is the closest thing that we have to an objective store of value. Many disagree, saying there is nothing objective to gold’s value, since it generates no cash flows. That’s not the point. The point is that there is a finite amount of gold in the earth’s crust, there is growing evidence that we have mined most of it, and aside from traveling to an asteroid, we aren’t going to produce much more. (Full disclosure: I have positions that would profit from rally in gold and the shares of gold mining companies.)
The cryptocurrency promoters argue that Bitcoin is an objective store of value, and they are somewhat right, since there can only be a certain number of coins in existence. But Bitcoin has some technical complications that gold does not, such as what happens if the power goes out? I have argued for years that tangible things you can pick up and touch are considerably more valued than lines of computer code. Time will tell.
But the biggest factor affecting gold prices recently has been the proliferation of negative-yielding debt. There are about $13 trillion of negative-yielding bonds in the world, and a shiny rock that yields nothing – but, admittedly, has some storage costs - is actually high-yielding in comparison.
Those who advocate the investment merits of gold are often labeled as “gold bugs,” which has become a somewhat derisive phrase, associated with conspiracy theories and tinfoil hats. But in the current political and economic environment, there are real intellectual reasons to think about gold other than hysteria over hyper-inflation due to money printing.
The hysteria over inflation due to money supply growth was pretty widely accepted in 2009, including by me, but it was the fear of inflation that drove people into gold, which worked out, and put options on 30-year bonds, which didn’t. In other words, gold can move on fear. It can move on fear of deficits and it can move on fear of MMT -- even if those fears are never realized. Markets are occasionally irrational, but that doesn’t mean there aren’t opportunities to profit from the irrationality.
Every bubble has two phases. There’s the first move, which is backed by lots of speculative froth and retail participation, and the second move, which is the real move and that may not happen until years later. It happened with tech, first in 1999, which eventually involved into the FAANG group of stocks: Facebook, Apple, Amazon.com, Netflix and Google. It seems to be happening in Bitcoin, as the most recent thrust higher is mostly happening without retail participation. And it is happening in gold, where a dearth of retail coin sales suggests the surge higher is more about institutional and central bank demand.
People tend to invest in what they have an affinity for and what they agree with. Environmentalists and animal rights folks invested in Beyond Meat. Cannabis “enthusiasts” invested in cannabis stocks. Conservatives like gold. We should all like to invest in things that go up, no matter what they are.
Weak U.S. data could trigger 10% stock plunge, says strategist
Published: July 10, 2019 8:54 a.m. ET By BARBARAKOLLMEYER MARKETS REPORTER
Step right up to the hot seat, Jerome Powell.
Investors from here to Hanoi can think of nothing else but the Fed chairman’s appearance on Capitol Hill Wednesday. So far, we’ve learned the Fed will act if needed (see Economy), but will the market get the quarter-point move it wants at the end of the month?
To be sure, the Fed could surprise markets with no move later this month, although this is seen as unlikely by market participants. And as much as investors count on central banks to keep driving up equities, rate-cut rallies have proven short lived over the past 20 years, say some.
Looking for surprises? Watch the data, not monetary policy, says our call of the day from Elia Lattuga, the deputy head of strategy research at UniCredit. He doesn’t see the Fed straying too far from market expectations in coming months.
“The big question mark is what the data will tell us about growth over the next few months,” Lattuga told MarketWatch in an interview. His darkish view sees the U.S. edging toward a recession in 2020, with “significant” signs of that showing up by year-end. Pressure from global trade developments won’t help either.
“The data picture is the key driver in this environment for risky assets. We project a broadly flat performance for equities for the rest of the year, so limited upside potential. However, we see risks that a deterioration in the growth outlook affects risk appetite,” and possibly trigger a 10% drop for stocks, he said.
The big banks have been indeed growing cautious, and Lattuga doesn’t stray far from that playbook as he suggests investors cash in on some gains they’ve seen this year, and take a less aggressive stance for the latter half of 2019.
The strategist says fixed income is an attractive place to park cash in the coming months, and investors might want to add longer-term bonds given support from monetary policy. But they should take care with higher-yield, and often higher risk bonds, given how they often track equity markets closely, says Lattuga.
Mergers in Gold Mining Space on the Rise
By William Mikula July 11, 2019
Last September, industry leader Barrick Gold announced an $18 billion mega-merger with competitor Randgold Resources.
The announcement was like a starter pistol going off before a race. It set off a succession of mergers…
In January 2019, Barrick’s largest rival—Newmont Mining—announced its own deal to buy Goldcorp for $10 billion, creating the world’s largest gold producer by output.
A month later, Barrick launched a $17.8 billion hostile bid to buy Newmont. The move sent shockwaves through the industry.
Barrick eventually dropped the bid. But the two giants agreed to a joint mining operation venture in Nevada.
Now, mergers and acquisitions (M&As) happen all the time. And I monitor them each week as part of what I do at our elite trading service, Teeka Tiwari’s Alpha Edge.
You see, M&As in the gold mining space offer high upside compared to those in other industries. And that’s exciting. Buyout targets can surge overnight—handing well-positioned traders like us double- and triple-digit gains.
So today, I’ll tell you why these mergers mean higher prices ahead for gold mining stocks—and how you can play this trend.
But first, let me show you why we think gold prices are going up…
We’re Seeing Merger Mania
Mining deals are on the rise for two primary reasons: supply and price.
In terms of supply, miners have been in a brutal bear market since 2011. Falling prices forced companies to rein in their exploration budgets. At the same time, they had to keep producing gold and silver to pay their bills.
And as companies mine their resources, they reduce their asset bases. To replace them, they must find new deposits or merger partners.
Exploring for resources is a tough, risky business. Instead, it’s easier for large players to buy proven deposits through mergers. They can let the exploration companies do all the hard work, then show up with a check.
And it makes the most sense to acquire well-run miners when their asset prices are rising. That brings me to the second reason mining deals are on the rise: the stealth bull market in gold.
As you can see in the chart below, gold has outperformed the S&P 500 over the past year:
While both are up, gold has quietly led the market by over three percentage points.
In fact, recently, the gold price hit six-year highs around $1,400 per ounce… And we expect this trend to continue.
As Big T explained yesterday, negative real rates will push gold higher as big investors rotate from bonds to gold:
The combination of surging inflation and low interest rates will cause a sharp increase in negative rates.
And faced with losing 1–2% per year holding government bonds… pension funds, central banks, and professional investors of every ilk will go full-tilt into gold.
Under this scenario, gold could easily trade at $2,500 per ounce. And this price action will ignite a gold stock rally unlike anything we’ve seen since the early 2000s.
And we’re already seeing this happen…
Last year, central banks bought 651.5 tons, up 74% from the previous year, according to the World Gold Council. And official sector purchases could reach 700 tons this year, Citigroup reports.
Private buyers remain active, too, with demand up 3% year-over-year. In fact, we’ve seen investing luminaries such as Paul Tudor Jones, David Einhorn, and George Soros all get bullish on gold this year.
Bottom line: A combination of steady, increasing demand caused by negative real rates and a lack of any major new supply (from new discoveries) will continue to propel prices upward.
And buying well-run small- and mid-cap miners will allow the majors to add to their asset base—and capitalize on gold’s next bull market.
You see, miners are leveraged to the price of gold…
Riding Gold’s Coattails
We can illustrate this leverage at work with an example…
Let’s say gold rises from its current price of around $1,400 per ounce to $1,500. That’s a 7% gain. So if you own physical gold, you’re up 7% at this point.
Now, let’s say it costs a gold miner $1,100 per ounce to mine the gold from the ground. At $1,400, the miner is making $300 per ounce ($1,400 minus $1,100).
But if gold rises to $1,500, that miner is now making $400 per ounce. So a mere 7% gold price rise leads to a 33.3% rise in profits.
Gold holds firm above $1,400 as markets look past robust U.S. data
Karthika Suresh Namboothiri, Diptendu Lahiri JULY 11, 2019 / 9:52 PM / UPDATED AN HOUR AGO
(Reuters) - Gold prices inched higher on Friday as investors shrugged off concerns that stronger-than-expected consumer inflation in the United States could influence the U.S. central bank’s decision on aggressive monetary policy easing.
Spot gold rose 0.3% to $1,407.31 per ounce as of 9:16 a..m. EDT (1316 GMT), having touched $1,412.20 earlier in the session. Prices have risen 0.4% so far this week.
U.S. gold futures rose 0.2% to $1,409.50 per ounce.
“Inflation data came out a little bit hotter than expected. It seems every day that the probability of rate cut versus keeping rates unchanged is flip-flap. There are uncertainties around that,” said Phillip Streible, senior commodities strategist at RJO Futures.
“If gold closes below $1,400 level on a Friday, (it) could be a blow to the bulls. I see a resistance level of $1,441 if there is enough demand for gold.”
The core U.S. consumer price index, excluding food and energy, rose 0.3% in June, data showed on Thursday, the largest increase since January 2018. The U.S. Federal Reserve had last month downgraded its inflation projection for the year to 1.5% from the 1.8% projected in March.
Bullion rates were quick to slump following the data, shedding nearly 1% in the latter part of its session, with the dollar erasing some losses.
However, the stronger-than-expected reading failed to shake convictions that the Fed will start cutting interest rates at a policy meeting later this month, with money markets still indicating one rate cut at the end of July and a cumulative 64 basis points in cuts by the end of 2019.
Against a basket of currencies, the dollar was lower for a third straight day, down 0.1%.
Market attention will be focused on comments by Chicago Fed President Charles Evans later in the session and New York Fed President John Williams on Monday, which will provide a chance to gauge how dovish the U.S. central bank will be.
Fed policymakers are scheduled to meet on July 30-31, where investors will look for further cues on monetary policy easing.
In the physical market, gold buying stalled in top Asian hubs this week as consumers sold back bullion to cash in on the steep price rally.
A recent import duty hike further dented waning interest in an Indian market hit by a surge in local rates
Other precious metals did not reflect gold’s sheen, with platinum dipping 0.5% to $816.25 per ounce and palladium declining 0.3% to $1,555.86. Silver inched marginally higher to $15.13 an ounce.
Palladium was set for its first weekly decline in six weeks, down 0.7% in the week.