A second sharp jolt in gold prices in two days drew speculation someone seeking to reverse an erroneous trade on Monday again managed to unsettle the market. Gold prices spiked in early European trading with about 815,000 ounces of gold bought in five minutes. That erased most of gold’s losses the previous day, when 1.8 million ounces of the metal were sold in a single minute. Monday’s slump halted near the key 200-day moving average, a positive sign for gold prices. This morning prices are edging back to levels seen before the sharp selloff – Like it never happened.
U.S. Global Investors’ Frank Holmes talks about gold’s outlook and a new ETF. – Myra Saefong
Gold prices have climbed by around 8% year to date—close to what they gained for all of last year.
That comes as no surprise to Frank Holmes, chief executive and chief investment officer at U.S. Global Investors, and he sees lots of reasons why prices could rally further—potentially to as high as $1,500 an ounce. That would be a 20% rise from its current level of roughly $1,250.
In fact, a positive outlook for the gold is a key reason why U.S. Global Investors, whose Gold & Precious Metals Fund USERX, -0.41% has a 4-star rating from Morningstar, plans to launch its first gold exchange-traded fund this week.
USERX was among the top 10 performers for equity precious metals funds, based on its five-year total return of -7.3%, according to data from Morningstar. Gold futures GCQ7, +0.30% rose 8.6% last year, but tallied a loss of about 37% from 2012 to 2015.
“The metal is responding to the typical demand drivers that I always discuss, like geopolitical uncertainty, a weak dollar, low interest rates,” said Holmes. “Perhaps one of the most shocking things is that last week, for the first time since the November [U.S. presidential] election, gold was outperforming the U.S. dollar.”
Gold futures settled under $1,250 an ounce Monday, but they are up about 8% year to date. They haven’t traded above $1,500 in more than four years.
“The weakening of the U.S. dollar DXY, -0.59% [as President Donald] Trump’s policy agenda continues to get derailed by all kinds of distractions” has been one of the biggest influences on the gold market, said Holmes.
Holmes said he believes the Fed is taking a more dovish approach to raising interest rates than expected. The Fed, however, is still penciling in another hike in 2017 and more in 2018, and plans to begin reducing the size of its balance sheet before the end of this year.
And “geopolitical risk and uncertainty, from Brexit to Trump’s policies to unrest in the Middle East,” he said, have given gold an added boost.
The “fear trade”—the idea that factors such as geopolitical turmoil, both here and abroad, and low-to-negative government bond yields drive the demand for safe-haven assets—is likely to continue to support gold, said Holmes.
“Right now, with rates still historically low and inflation in the 2% range, government bond yields are low to negative, in some cases,” he said. “Why would investors want to lock in negative yields for the next two to five years?”
“In light of this, I think haven investors see gold as a much more reliable store of value,” he said.
Physical demand for gold has reached record levels in both China and India, according to Holmes. The devaluation of the yuan and a slowing real-estate market has helped to drive demand in China, while India saw its gold imports rise fourfold in May from the same time a year, he said, as traders fear a higher tax rate on jewelry.
Meanwhile, central-bank purchases of gold are still “robust” in China and India, Holmes said.
“Currently gold only represents 2% of China’s foreign reserves. Compare that to the U.S. where gold represents 75%,” he said. That means “there is still an enormous opportunity for China to continue to accumulate the yellow metal.”
Right now it’s a buyers’ market for high-quality gold mining stocks, said Holmes.
That’s come on the back of a rebalance this month of the VanEck Vectors Junior Gold Miners exchange-traded fund GDXJ, -0.47% he said.
The market didn’t see junior gold miners follow through with the gains in gold because the GDXJ cut nearly half of its exposure to the space, with lots of high-quality and small- and midcap names getting pushed out—offering an opportunity for investors to pick up some the stocks at a discount, Holmes said.
Against that backdrop, U.S. Global Investors will offer its very first gold ETF this month. It already runs two gold-related mutual funds, the Gold & Precious Metals Fund and the World Precious Minerals Fund UNWPX, -0.64%
So far this year, the VanEck Vectors Gold Miners ETF GDX, -0.13% is up around 8%, while the VanEck Vectors Junior Gold Miners ETF has climbed 7%. The physical gold-backed SPDR Gold Trust GLD, +0.38% has also tacked on roughly 8%.
Shares that U.S. Global Investors’ prefers include Klondex Mines Ltd. KLDX, -3.04%Wesdome Gold Mines WDO, -0.95% and Kirkland Lake Gold KL, +2.88% which are “all frugal, small- to midcap names,” said Holmes.
While he contends gold could climb to as high as $1,500 an ounce, he also said that a low of $1,000 is a possibility. The low so far for 2017 was $1,162 at the start of the year.
Managing your expectations is essential, particularly when it comes to gold investing, said Holmes.
He said he’s “encouraged” by the gains that gold has seen in the first half of 2017, but “nobody can say what the future holds, so hope for the best but prepare for the worst.”
This morning’s flash-crash dump of over $2 billion notional in gold futures broke numerous technical levels, but as the precious metal bounces back off support, the question is will the bounce continue? Citi answers…
Having tested up towards its 50-day moving average (green line), this morning’s sudden and heavy volume flash-crash plunged the precious metal below its 100- and 200-day moving average (orange and red respectively below).
But as Citi notes, Gold is presently testing a strong area of support from $1,233-$1,237 where the 200 day and week moving averages converge with the 76.4% retracement of the May-June rally.
Citi concludes… we have confirmed triple weekly momentum divergence on Gold and as a reminder, this is one of our favorite indicators to suggest that a trend (downtrend in this case) is running out of steam. – Zerohedge
Following this morning’s flash crash in gold, in which a “fat finger” – usually a euphemism for any trade that can not be logically explained yet one which reprices a given asset class substantially lower as happened with gold – suddenly sold $2.2 billion worth of gold in under a minute, taking out the entire bidside stack, we were expecting banks to immediately come out with bearish reports on gold, piggybacking on the latest central bank-facilitiated smackdown, and allegedly allowing their prop desks to load up on the yellow metal on the cheap.
We were surprised, however, when moments ago Goldman came out with a report explaining why the bank is now bullish on gold, Further, in the note from Goldman’s x-asset strategist, the bank laid out three specific reasons why gold may trade well above the bank’s commodity team year-end target of $1,250.
This is what Goldman said moments ago:
Across asset classes last week copper was the best performing asset (+2.5%), while oil was the worst performing asset (-4.3%, Exhibit 3). Gold’s performance was flat (+0.1%) over the same period, but had an intraday min at 1.6% today. Much of the focus has obviously been on oil where concerns are that expanding supply in the US and Libya will counter OPEC cuts. Gold has received less focus, although its cross-asset correlations have quietly been rising to new extremes (Exhibit 1).
Our commodity team’s view is gold at $1250/oz over 12 months as higher real rates from Fed tightening could put further pressure on gold, but this may be offset by 3 things:
- lower returns in US equity (as we expect) should support a more defensive investor allocation,
- EM $GDP acceleration would add purchasing power to EM economies with high propensity to consume gold, and
- GS expects gold mine supply to peak in 2017.
Gold has been increasingly trading as a “risk off” asset, with its correlation with global bonds at the 100th percentile since 2002…
… and should thus be sensitive to our expectation of rising rates from here. However, with global growth momentum likely having peaked, gold could represent a good hedge for equity, in particular in currencies with low and anchored real yields.
Gold implied vol remains attractive for investors’ of either view: it trades at its 0th percentile relative to the past 10 years (Exhibit 28).
While Goldman’s arguments are sound, the fact that the bank is urging its clients to buy gold, ideally from Goldman, suggests that the selloff is most likely nowhere near done. – Zerohedge
Gold traders will not “abandon” gold as the Federal Reserve (Fed) proceeds to hike rates further, TD Securities said in a report, adding that the yellow metal will be driven by geopolitical and economic risks.
Analysts from TD Securities said that within the next six months, gold will be trading around $1,275 level, supported by flat yield curve and dovish monetary policies around the world.
“Various risks, ranging from fully valued equity markets to geopolitical and economic concerns should keep the precious metals complex bid,” TD Securities’ global head of commodity strategy Bart Melek and the bank’s commodity strategists Ryan McKay and Daniel Ghali said in the report.
“This, in combination with a flat yield curve and very low real rates across the globe prompt us to believe that investors will not abandon gold, even as the Fed hikes more, and we still believe our $1,275/oz price estimate is still well within reach over the next six months,” they wrote.
Gold prices struggled after the Fed rate hike in June, which was followed by hawkish Fed speakers. In response, the precious metal dropped significantly, reaching $1,240 levels.
“After hitting the lows, the yellow metal jumped to $1,260, but fell to as low as $1,235/oz on Monday—apparently due to a large ‘fat finger’ trade,” the report said. “A busy week of Fed speakers and economic data in the US could well place gold prices on a more distinct path moving forward.”
This week, investors are paying close attention to the Fed speakers as well as the U.S. data releases, including the third reading of Q1 GDP, May core PCE and personal consumption, May personal income/ personal spending and construction spending, June Conference Board consumer confidence, as well as Chicago PMI and ISM manufacturing.
The macro releases will have an additional value this week, as they provide clues whether or not the Fed will actually be able to raise rates further this year, while also starting to reduce its balance sheet.
TD Securities expects the Fed speakers to remain “hawkish” this week, which could put pressure on gold. But, analysts noted that the data could surprise on the downside and send the yellow metal higher.
“The May core PCE deflator statistics are of particular interest, as a weak print will make the Fed’s inflation chatter sound hollow,” analysts wrote.
Other key elements that will keep gold prices from retreating are geopolitical uncertainties, according to the report.
“[There are] ever present uncertainties in the US political realm, Brexit negotiations, Italian elections, and tensions in Syria, North Korea, and Qatar which should provide support as investors hold onto the metal as an uncertainty hedge,” Melek, McKay, and Ghali wrote. – Anna Golubova
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