Gold Has Been One of the Few Bright Spots in 2022 (So Far)

We’re almost halfway through 2022, and so far gold has been the big winner after oil, coal and other commodities. The yellow metal has managed to stay positive since the start of the year, skirting pressure from surging yields and a strong U.S. dollar. Meanwhile, nearly every other asset class—from large-cap and small-cap equities to bonds, from real estate investment trusts (REITs) to cryptocurrencies—has fallen into either correction or bear market territory.

Gold Has Been One of the Few Bright Spots in 2022

I believe this shows that gold has retained its perceived role as a store of value during times of decades-high inflation and economic and geopolitical uncertainty. As I often say, investing in gold won’t make you a billionaire, but it could help stabilize your portfolio when everything else is crashing.

Dollar at 20-Year Highs

I’m most impressed that gold has stayed afloat even as the U.S. dollar has strengthened to 20-year highs against a basket of other major currencies. Since gold is priced in dollars, the two assets have historically shared an inverse relationship, with one falling when the other rises, and vice versa. At the beginning of the pandemic, the dollar spiked as investors sought a safe haven, which put pressure on gold. The value of the dollar is now highly elevated on the back of interest rate hikes, and yet the yellow metal has continued to trade above $1,800 an ounce.

It’s for this reason, among others, that I agree with Newmont CEO Tom Palmer, who said this week that gold’s floor price has likely increased from previous support of around $1,200 to between $1,500 and $1,600 currently.

Gold Price Has Been Highly Resilient Against an Elevated Dollar

While I’m on this topic, a stronger dollar is mixed news. On the one hand, it can help limit the effects of inflation by offsetting the price of imports. On the other hand, it makes U.S. exports more expensive to overseas buyers. We’ll likely see lower fourth-quarter earnings for companies with international exposure as a result. Earlier this month, Microsoft joined Coca-Cola, Procter & Gamble and a host of other multinational U.S. companies in cutting forecasts for the remainder of the year due to a stronger greenback.

Will S&P 500 Companies Raise Their Dividends to Compete with Treasury Yields?

As I mentioned earlier, government bonds have steadily sold off this year, pushing yields to multiyear highs. The two-year yield was trading as high as 3.45% this week, a substantial increase from 0.78% at the start of the year.

This may attract yield-seeking investors, but I urge them to keep in mind that inflation is running at an annual rate of 8.6%. That means they’re effectively paying the government for the privilege of holding its debt.

At the same time, dividend investors may have a hard time selecting stocks that pay out at a competitive rate. As of this month, the S&P 500 has a dividend yield of only 1.68%, up slightly from the beginning of 2022 but down from June 2020, when it was closer to 2.0%. 

Treasury Yields Have Surged. Can Dividends Keep Pace?

It’s well known that gold doesn’t pay any income, but with stocks and bonds out of favor, the metal may be a better bet to potentially keep ahead of inflation right now.

Want to learn more about gold and inflation? Watch our YouTube video by clicking here!  

Subscribe to the Frank Talk Blog!

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 4.79%. The S&P 500 Stock Index fell 5.70%, while the Nasdaq Composite fell 4.78%. The Russell 2000 small capitalization index lost 7.44% this week.
  • The Hang Seng Composite lost 3.48% this week; while Taiwan was down 14.15% and the KOSPI fell 18.02%.
  • The 10-year Treasury bond yield rose 7 basis points to 3.23%.

………………..

Energy & Natural Resources

Strengths

  • The best performing commodity for the week was lumber, up 4.86%, on what could be a bear market rally. Against that backdrop, housing starts dropped 14.4% in May and the average 30-year fixed rate mortgage has now climbed to 5.65%, the highest since 2008. Lumber is down 60% since March.
  • According to Baker Hughes, the U.S. rig count increased by six this week to 733, with the land rig count up by seven to 718. The offshore rig count came down by one to 15.
  • India’s fuel consumption has increased by 24% year-over-year to 18.269 million tons in May 2022. According to data from the Indian oil ministry’s Petroleum Planning and Analysis group, the increase is due in part to a relatively lower base in 2021 amid a high count of Covid cases. Last month was the biggest year-on-year jump since April of 2021.

Weaknesses

  • The worst performing commodity for the week was natural gas, down 20.58%. Freeport LNG, one of the largest U.S. operators of LNG export terminals, on Tuesday said that damage from last week’s fire at its Texas plant would keep it fully offline until September, reports Reuters, with only partial operation through year end. Natural gas prices slumped in the United States and soared in Europe on news of an extended shutdown.
  • Tin suffered a second day of heavy selling in London as surging inflation and the rising risk of recession in major economies threatens to put an end to a long-running boom in demand from the electronics sector. Prices for the soldering metal fell as much as 7.6% on the London Metal Exchange, extending Monday’s 6.7% drop.
  • European gas prices surged 50% this week as Moscow tightened its squeeze on crucial gas flows to the continent, forcing Europe to pull gas from winter storage to confront the prospect of keeping their economies running without Russian gas. On a related note, the Biden administration’s leading international energy adviser has called on India to not go “too far” when increasing imports of discounted Russian crude that has lost buyers in Europe. Indian purchases of seaborne Russian oil have surged as exporters slash prices for Urals, the country’s main crude export stream, after European refineries began shunning the cargoes and the EU moved to end its dependence on Russian energy following the invasion of Ukraine.
Indian Imports of Russian Oil Are Soaring

Opportunities

  • JPMorgan expects that tight stocks and low inventories will be a recipe for higher commodity prices. Oil could top $150 per barrel in the short-term, while other crops such as corn could top $13 a bushel. Both Russia and China have reduced refining capacity while the active Atlantic hurricane season could threaten Gulf of Mexico refiners. Diesel fuel remains in tight supply with the transportation sector making a comeback.
  • After a yearslong deadlock, Ecuador and Chile have resumed negotiations over a partnership to develop a major copper deposit, reports Bloomberg, just as demand for the wiring metal is set to surge in a nascent clean-energy transition. Chile’s state copper producer Codelco agreed to a request by its Ecuadorian counterpart Enami to suspend two arbitration processes over the Llurimagua copper-molybdenum exploration project in the Andean region of Imbabura, Ecuador Energy and Mines Minister Xavier Vera said. “That suspension generated positive conditions for talks,” Vera commented.
  • A top Brazilian mining official expects his country to attract a wave of investment in copper, nickel and lithium in the coming years as streamlined rules and practices improve access to rich deposits of the battery metals. Brazil, the biggest iron ore producer after Australia, is looking to lure more exploration and development in minerals key to the clean energy transformation. In order to do that, the government is overhauling geological information, opening inactive areas, and working on indigenous consultation processes, said Pedro Paulo Dias Mesquita, secretary of geology, mining and mineral transformation at Brazil’s Ministry of Mines and Energy.

Threats

  • According to UBS, iron ore prices have recovered from a low of $87 per ton in November 2021 to trade in a range of $120-160 per ton in 2022. The recovery is driven by improving fundamentals with iron ore demand, supply struggling and inventories falling. This is supported by an expectation that China steel demand will pick up post-lockdown supported by stimulus. UBS expects prices to fall back in 2023-24 to the 90th percentile of the value-in-use curve or $70-80 per ton as supply normalizes and demand moderates. UBS also expects the iron ore market to be broadly balanced in 2022 and move into a growing surplus in 2024. 
  • The Energy Information Administration (EIA) forecasts U.S. refinery utilization to average 94% in the third quarter of 2022 given high wholesale product margins, at or near their highest levels in the past five years. However, operable refinery capacity is 900 million barrels per day lower than the end of 2019, suggesting that total refinery output of products is unlikely to reach its highest level in the past five years, although still impactful in helping moderate wholesale margins down from record levels.
  • Goldman made headlines when it warned that a searing rally in lithium will go into reverse this year as supply from unconventional new sources overwhelms demand. Credit Suisse Group AG also joined in predicting a correction. However, other specialists including London-based Benchmark Mineral Intelligence are loudly pushing back.

……………….

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Sirin Labs, rising 906.53%.
  • The United Kingdom’s digital minister reiterated the government’s ambition to make Britain a global cryptocurrency hub while simultaneously sounding a cautious note about the potential criminal uses of digital assets. “We do intend for the United Kingdom and London to be crypto centers,” Chris Philp said in an interview with Bloomberg Radio on Wednesday.
  • The Bank of Israel is working with the Hong Kong Monetary Authority on a trial which will test a new digital currency, including against cyber security risks, the Bank of Israel said. The joint project will start in the third quarter, will use a two-tier central bank digital currency (CBDC), and will be issued by the central bank and then distributed by financial intermediaries like banks, reports Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Etherstones, down 100%.
  • Bitcoin plunged to the lowest level in about 18 months in Asia trading on Monday as the impact of Friday’s U.S. inflation data continued to reverberate through global risk assets. Traders are boosting bets for a more aggressive pace of Federal Reserve tightening after data on Friday showed U.S. inflation jumped to a fresh 40-year high in May, writes Bloomberg.
A rough time bitcoin and ethereum continue their downward trend after inflation data
  • Business intelligence company MicroStrategy Inc., which over the last two years has amassed more than 129,000 Bitcoin tokens, has plunged as much as 23% as the crypto markets fall lower. Cryptocurrency stocks including Marathon Digital Holdings, Riot Blockchain and Coinbase Global Inc. also saw outsized declines of at least 14% each. The MVIS CryptoCompare Digital Assets 100 Index, which measures the 100 largest digital assets, sank as much as 14% this week.

Opportunities

  • Changpeng Zhao, co-founder and CEO of Binance, thinks the crypto winter is a great time to increase investment in both talent and acquisitions. “We have a very healthy war chest, we in fact are expanding hiring right now,” Zhao said in a virtual interview during last week’s Consensus 2022 conference. Binance is also looking to increase its investment in other companies, building on efforts such as its $200 million investment in Forbes, which Zhao explains is a strategic move to help drive the adoption of blockchain technology into more sectors, writes Bloomberg. 
  • Circle Internet Financial is launching a euro-based version of its popular USDC stablecoin, which has been gaining traction after its closest rival Tether has come under increased scrutiny. Euro coin will be available June 30 to institutional customers as a regulated euro-backed stablecoin issued under the same full-reserve model as USDC, reports Bloomberg. 
  • Goldman Sachs Group has started to trade a type of derivative tied to Ether, as Wall Street investors look for ways to bet on the world’s second-largest cryptocurrency. The bank successfully executed its first trade of Ethereum non-deliverable forwards, a derivative that pays out in cash based on the price of Ether, according to Bloomberg. 

Threats

  • Celsius Network paused withdrawals, swaps, and transfers after weeks of speculation over the sustainability of the outsized returns being offered by the DeFi lending platform, fueling a broad cryptocurrency selloff, reports Bloomberg. Crypto markets tumbled after the Celsius announcement, with Bitcoin dropping as much as 14% to the lowest level since December 2020 and other major tokens like Ether also falling sharply, the article explains. 
  • Coinbase Global Inc. announced Tuesday it will lay off 18% of its workforce in another sign of a worsening crypto downturn that’s shaved off hundreds of millions of the total cryptocurrency market value. The biggest crypto exchange in the U.S. is following in the footsteps of other cryptocurrency-related businesses that have recently cut staff, including rival exchange Gemini Trust Co. and lender BlockFi, writes Bloomberg. 
  • Bitcoin tumbled again this week, driving the token to the brink of $20,000, as evidence of deepening stress within the crypto industry keeps pilling up. There’s a growing sense of anxiety about the stability of crypto projects large and small. Bitcoin fell as much as 8.6% mid-week, resulting in nine straight days of loses, writes Bloomberg.

Gold Market

This week gold futures closed at $1,840.10, down $35.40 per ounce, or 1.89%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 5.80%. The S&P/TSX Venture Index came in off 9.13%. The U.S. Trade-Weighted Dollar rose 0.50%.

Date Event Survey Actual Prior
Jun-14 Germany CPI YoY 7.9% 7.9% 7.9%
Jun-14 Germany ZEW Survey Expectations -26.8 -28.0 -34.3
Jun-14 Germany ZEW Survey Current Situation -31.5 -27.6 -36.5
Jun-14 PPI Final Demand YoY 10.9% 10.8% 10.9%
Jun-14 China Retail Sales YoY -7.1% -6.7% -11.1%
Jun-15 FOMC Rate Decision (Upper Bound) 1.50% 1.75% 1.00%
Jun-16 Housing Starts 1,693k 1,549k 1,810k
Jun-16 Initial Jobless Claims 217k 229k 232k
Jun-17 Eurozone CPI Core YoY 3.8% 3.8% 3.8%
Jun-23 Initial Jobless Claims 232k 229k
Jun-24 New Home Sales 595k 591k

Strengths

  • The best performing precious metal for the week was silver, but still down 1.45%. Tom Palmer, CEO of Newmont Mining, the biggest gold producer, sees a higher floor forming under the gold market as years of stimulus devolve into a fight to contain inflation. Gold has held up much better than cryptocurrencies as the broader markets have pulled back. This week we saw several major crypto firms freeze customer withdrawals.
  • Awalé Resources closed a private placement with Newmont Ventures, a wholly-owned subsidiary of Newmont Corporation. Awalé projects are in Côte d’Ivoire and Glen Parson is the CEO. Odienné is the main project and the agreement is staged such that Newmont could earn up to 75% of the project.
  • Streaming transactions totaled $1.7 billion in 2021, the strongest year since 2015. The sector has booked $487 million year-to-date compared to $455 million by this time last year. Wheaton Precious Metals has again been the most active with $366 million in streams, followed by Osisko Gold Royalties with $110 million.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 6.06%. Sibanye-Stillwater said it has suspended operations at its Montana-based palladium and platinum mines after the area was hit by flooding that washed away access roads and bridges. The Johannesburg-based precious metals producer was forced to evacuate some workers from the Stillwater and East Boulder mines and will wait for the waters to subside before conducting an assessment, spokesman James Wellsted said by phone.
  • Gold futures continue to consolidate in a bearish pattern as the precious metal is caught between a broad risk-off and strong dollar flow. There may be an eventual resumption of the medium-term downtrend if the market continues to trade below $1,889-$1,899 and $1,917-$1,927 resistance layers. Broader range support remains near $1,700.
  • Cost inflation continues to be a key theme for precious metals producers, and against that backdrop, the royalty names as a group outperformed in 2021, (down 4% on average versus the producers down 13% and gold 4%). So far in 2022, the royalty sector is down 2% on average against a flat gold price (up 1%), and while slightly lagging the senior producers they are outperforming the intermediate and junior gold producers, down 12% and 19%, respectively.

Opportunities

  • Gold held much of its biggest gain in more than three months, reports Bloomberg, as shifting expectations of the speed of the Federal Reserve tightening helps the yellow metal rediscover its role as the ultimate haven asset. The resilience of bullion as the Fed announced its biggest interest-rate increase since 1994 is reminding investors of gold’s appeal, the article continues.
Gold is close to little changed this year amid turmoil in other assets
  • Gold Fields has agreed to acquire Canada’s Yamana Gold for around $7 billion, reports Bloomberg. The deal provides greater geographic diversification but material EPS dilution. Under the terms of the agreed offer, 100% of Yamana outstanding shares will be purchased at a ratio of 0.6 of an ordinary Gold Fields share, valuing Yamana at $6.7 billion. The transaction is expected to close in the second half of the year. Yamana’s board has agreed to back the deal, which will require approval from both sets of shareholders.
  • Orla Mining will acquire all of the issued and outstanding shares of Gold Standard by way of a court-approved plan of arrangement. Gold Standard’s key asset is the 100%-owned South Railroad Project, a feasibility-stage, open-pit, heap leach project located on the prolific Carlin trend in Nevada. In February 2022, Gold Standard completed a robust feasibility study and permitting activities are currently underway. Gold Standard also owns the Lewis Project, a large, strategically located, prospective land package on the Battle Mountain trend in Nevada.

Threats

  • Firmer inflation is historically bullish for gold prices. Now, however, it is being quickly counteracted by more aggressive pricing for a policy response from the Federal Reserve and other central banks. As such, there needs to be more signs that economic growth is cracking under the strain of higher inflation and tighter financial conditions, which would, in turn, support sustained safe-haven inflows into the precious metals sector.  
  • Dacian Gold announced it was suspending operations at Mt. Morgan, and open pit operations at Jupiter are to be suspended at the end of June. Over the past six months, Dacian noted it has seen a rapid change in the environment with significant inflationary cost pressures. Dacian will process existing stockpiles of ore and focus on exploration drilling below the Jupiter Pit.
  • Renowned billionaire hedge fund manager Stanley Druckenmiller says that in an inflationary bull market, he wants to own Bitcoin more than gold “for sure.” However, he explained that in a bear market, he would prefer to own the yellow metal.

 

Author: Frank Holmes

 

You can read the full article at https://www.usfunds.com/resource/gold-has-been-one-of-the-few-bright-spots-in-2022-so-far/