Gold Is Catching a Bid on Pandemic and Inflation Fears.

Gold Is Rising on Pandemic and Inflation Fears. Are You Participating?

Gold notched its third straight week of higher prices as the yield on the 10-year Treasury dipped below 1.3% for the first time since February. The highly transmissible Delta variant was also ruled the most dominant strain of coronavirus in the U.S., threatening economic growth and raising uncertainty about the next interest rate hike.

Against this backdrop, the yellow metal is now flashing a golden cross, meaning the 50-day moving average is trading above the 200-day moving average. In the past, this has been a bullish indicator for gold prices, which are still off some 12% from their all-time highs set last summer.

Gold price flashes a golden cross

In the short to medium term, it appears as if gold demand will continue to be driven by central bank policy, which should remain accommodative even as inflation fears increase. According to the CME Group’s FedWatch Tool, there’s a 75% probability that interest rates will stay in the 0.00% to 0.25% range a year from now, leaving plenty of time for gold to test $2,000 an ounce or more.

Pandemic Still Tops Central Bankers’ List of Worries, with Inflation Not Too Far Behind

Speaking of central banks, UBS released the results of its annual reserve management survey this week, which show that managers are still very much concerned with the handling of the pandemic.

Nearly 80% of respondents cited failure to end the pandemic as their number one concern impacting the global economy right now, with more than half of them saying they believed it would be over only after 2022. Here in the U.S., the rate of vaccination has slowed considerably in certain populations, allowing Canada, the United Kingdom, Italy and Germany to catch up. In low-income countries, meanwhile, only 1% of people have received one dose of the vaccine.

Central bankers’ concern is not unfounded. IHS Markit’s chief business economist published an article this week showing there’s a strong correlation between vaccination rates and economic growth. The higher a country’s vax rate, the higher its PMI reading was in June; the reverse was also true.

Main concerns impacting the global economy, according  to central banks

Rounding out the top three concerns impacting future growth were government debt levels (71% of respondents), something I’ve written a lot about, and inflation (57%). I should point out that inflation did not even appear on the list of concerns one year ago when the last survey was taken. The London Bullion Market Association (LBMA) also notes, in its review of the second quarter, that there were more than 100,000 press articles published about inflation in May, far more than on COVID-19.

Gold Can Help Manage Risk

All of these concerns, I believe, favor gold as a portfolio diversifier. Low bond yields have pushed investors into riskier assets, including stocks. This has been a winning strategy as major indices have been hitting all-time highs, but it’s important to maintain a position in gold to help manage risk. I recommend a 10% weighting, with 5% in physical gold and 5% in gold stocks. A 1% to 2% allocation in Bitcoin and Ether, not to mention crypto mining stocks, also makes sense right now.

HIVE Blockchain Technologies (HVBT) Featured in Times Square

Gold Is Rising on Pandemic and Inflation Fears. Are You Participating?

As many of you are aware, HIVE Blockchain Technologies, the world’s first publicly traded cryptocurrency mining company, listed on the tech-heavy Nasdaq on July 1, four years after its debut on the TSX Venture Exchange.

I was very happy this week to see HIVE featured on Nasdaq’s Times Square marquee, which reaches 1,000,000 a day.

I’m also grateful that HIVE team members and I have the opportunity this coming Monday to participate in the closing bell ceremony at Nasdaq. We’re only getting started!

Read the latest HIVE press release by clicking here. 

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.24%. The S&P 500 Stock Index rose 0.43%, while the Nasdaq Composite climbed 0.43%. The Russell 2000 small capitalization index lost 1.13% this week.
  • The Hang Seng Composite lost 3.62% this week; while Taiwan was down 0.27% and the KOSPI fell 1.94%.
  • The 10-year Treasury bond yield fell 6 basis points to 1.36%.

 

Blockchain and Digital Currencies

 

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Axie Infinity, rising 136.77%.
  • Circle, a payments infrastructure company which also focuses on stablecoin development, announced its plan to go public via a special purpose acquisition company (SPAC). The company is set to merge with blank-check company Concord Acquisition Corp. in a deal valued at $4.5 billion and is expected to be listed on the New York Stock Exchange (NYSE) under the ticker “CRCL.” Circle is the principal developer of the USD Coin (USDC), the second largest stablecoin after Tether (USDT), and is backed by Goldman Sachs, Fidelity Management, and Adage Capital Management.
  • Tetra Trust became Canada’s first regulated custodian for cryptocurrencies after being registered by the government of Alberta. The company’s CEO, Eric Richmond, mentioned that there was a pressing need for a regulated custody provider in Canada as the country has become a hotspot for cryptocurrency-related companies, exchange-traded funds (ETFs), and trading platforms. The firm is backed by Coinsquare, which is a Toronto-based crypto trading platform, Coinbase Ventures, and the Canadian Securities Exchange, among others.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performer for the week was Telcoin, down 22.42%.
  • The Bank of Thailand (BoT) stressed that cryptocurrencies like Bitcoin and Ethereum are not legal tender in the country and that it will coordinate with Thailand’s Securities and Exchange Commission to mitigate any risks to the country’s financial system if cryptocurrency payments become widespread. Officials from the bank also noted that parties involved in such transactions could face risk of price volatility and cyber theft.
  • Scott Minerd, the chief investment officer at Guggenheim, believes that there is no reason for institutional investors to buy Bitcoin now and that the largest cryptocurrency could plummet to $10,000-$15,000 range. The latest tumble in Bitcoin’s price is attributable to increasing regulatory scrutiny from China to the U.K. and the environmental impact of mining the cryptocurrency. Currently, Bitcoin is trading around $33,500, almost 50% lower than its all time high of more than $64,000.

Opportunities

  • The Banque de France (BdF) and the Monetary Authority of Singapore partnered to test a cross-border central bank digital currency (CBDC) transaction using a permissioned version of Ethereum called Quorum, which is developed by JPMorgan. This marked the first use of a smart contract-based, automated liquidity pool for the digital EUR/SGD currency pair. After the experiment, the BdF stated that the automated liquidity pool and market-making service for EUR/SGD currency pairs could be scaled up to support participation of multiple central and commercial banks in different jurisdictions.
  • Square Inc. announced that the company is working on building a Bitcoin hardware wallet and service to make Bitcoin custody more mainstream. Although the project is in still in its early stages, the U.S. based financial services firm will continue to take input from stakeholders as it tries to bring a mobile-friendly, “assisted-self-custody” wallet to a global audience. Square’s foray into Bitcoin custody could increase attention and investment into the industry.
  • Osprey Funds, a digital asset management firm, filed to register its Osprey Bitcoin Trust (OBTC) as a Securities and Exchange Commission (SEC) reporting company. The registration would increase OBTC’s transparency and liquidity and will require it to file audited financial statements with the SEC. OBTC has an annual management fee of 0.49% and an additional 0.3% in other expenses from services like crypto custody, while the Grayscale Bitcoin Trust (GBTC) has a management fee of 2%. Meanwhile, Bitcoin mining difficulty decreased 28% after China’s crackdown, increasing the profitability of miners. It reached levels last seen more than a year ago when Bitcoin was trading around $9,000. The chart below shows the progression of Bitcoin mining difficulty over the last 12 months.

Computing power needed to mine a bitcoin block plinged after china's crackdown

Threats

  • A survey of 1,233 El Salvador’s citizens, conducted by pollster Disruptiva, suggests that majority of the country’s people are wary of the implementation of the legislated Bitcoin Law, which makes the cryptocurrency a legal tender within the country. Around 54% of respondents viewed the law as “not at all correct”, while only 20% totally supported it. Further, 46% responded that they do not know anything about Bitcoin, and 65% would not be keen on being paid in the crypto. Although the Bitcoin Law is set to come into effect on September 7, 2021, there seems to a hesitancy amongst El Salvadorians regarding using the cryptocurrency for everyday purposes.
  • Santander Bank in the U.K. announced that it will no longer allow its customers to send payments to Binance, following the footsteps of Barclays and Natwest, citing warnings from U.K.’s Financial Conduct Authority (FCA). FCA warned consumers that Binance Markets Limited, which is a separate entity from Binance exchange, could not operate and engage in any regulated activity in the U.K.
  • The Economic Commission for Latin America and the Caribbean (ECLAC) warned that El Salvador’s Bitcoin Law poses several systemic risks as well as money laundering risks. ECLAC, which is a United Nations’ regional commission to encourage economic cooperation, added that Bitcoin does not fulfil some basic functions of money and is subject to extreme volatility. This warning comes on back of the International Monetary Fund stating that accepting Bitcoin as legal tender could pose legal and financial concerns, and the World Bank refusing to assist El Salvador in the country’s transition to adopting the cryptocurrency.

Gold Market

This week spot gold closed at $1,808.32, up $21.02 per ounce, or 1.18%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 0.12%. The S&P/TSX Venture Index came in off 3.09%. The U.S. Trade-Weighted Dollar fell 0.13%.

Date Event Survey Actual Prior
Jul-6 Germsny ZEW Survey Expectations 75.2 63.3 79.8
Jul-6 Germany ZEW Current Situation 5.5 21.9 -9.1
Jul-8 Initial Jobless Claims 350k 373k 371k
Jul-13 Germany CPI YoY 2.3% 2.3%
Jul-13 CPI YoY 4.9% 5.0%
Jul-14 PPI Final Demand YoY 6.7% 6.6%
Jul-14 China Retail Sales YoY 10.9% 12.4%
Jul-15 Initial Jobless Claims 350k 373k
Jul-16 Eurozone CPI Core YoY 0.9% 0.9%

 

Strengths

  • The best performing precious metal for the week was gold, up 1.18%. Compass Gold reported the results of the recently completed drilling at the Old Sam and Dialéké prospects, located on the Company’s Sikasso Property in Southern Mali. The first drilling results at the Old Sam target, 40 km south of Tarabala, are highly encouraging. Initial drilling has discovered a shallow zone of low-grade gold.
  • Gold continued to climb above $1,800 an ounce this week as Treasury yields and the U.S. dollar fell ahead of the release of Federal Reserve minutes. Central banks may be regaining their appetite for buying gold after staying on the sidelines for the past year. Central banks from Serbia to Thailand have been adding to their gold holdings, writes Bloomberg this week, and Ghana recently announced plans for purchases, as the specter of accelerating inflation looms and a recovery in global trade provides the firepower to make purchases. A rebound in buying, which had dropped to the lowest in a decade, would bolster the prospects for gold prices as some other sources of demand falter, the article continues.

Spot gold climbs above its 100-day moving average

Weaknesses  

  • The worst performing precious metal for the week was silver, down 1.39% after two consecutive weekly gains. Exchange-traded funds cut 168,278 troy ounces of gold from their holdings in the last trading session, bringing this year’s net sales to 6.4 million ounces, according to data compiled by Bloomberg. The sales were equivalent to $299 million. Total gold held by ETFs fell 6% this year to 100.7 million ounces, the lowest level since May 2020.
  • The Perth Mint says gold coin and minted bar sales totaled 72,910 ounces last month, according to figures on its website. Sales compare with 91,146 ounces in May, according to previously released data.
  • Facing several headwinds (expensive valuations and pandemic travel restrictions), global gold M&A (merger and acquisition) activity in the second quarter slowed quarter-to-quarter. Just nine transactions were announced versus 14 in the first quarter.

Opportunities

  • Roscan Gold reported positive results from an additional 14 diamond drilling and reverse circulation holes totaling 3,066 meters at the Southern Mankouke Zone. Mankouke Discovery Zone, or MS1, confirmed mineralization open at depth and Mankouke Discovery Zone, or MS3, shows a potential high-grade extension to the west, the company said in a news release.
  • AngloGold Ashanti appointed former BHP Group executive Alberto Calderon to its top job, ending a nearly year-long head hunt that has weighed on the shares of the No. 3 gold producer. AngloGold has not had a permanent CEO since Kelvin Dushnisky’s abrupt departure last September after holding the position for just two years. The Johannesburg-based miner’s shares have underperformed its peers in the past year as the CEO hunt dragged on and the company had to suspend operations at a mine in Ghana.
  • Silvercorp reported assays from the 2021 exploration program at the SGX mine at its Ying Mining District. The gold exploration results are encouraging given the geological belt hosting the Ying Mining District is known more for its gold endowment than silver and base metals. The market is not ascribing any value to the gold potential at Ying and offers investors a free option to considerable exploration upside.

Threats

  • First Mining reports that a forest fire is currently active within one kilometer of the camp at the company’s Springpole Gold Project located in northwestern Ontario. Fire crews from the Ministry of Natural Resources and Forestry have been working on containment measures over the weekend, including both ground and aerial suppression using water bomber aircraft and helicopters. Due to the proximity of the forest fire, First Mining has suspended operations at Springpole, and MNRF firefighters are currently staged at the Springpole site working to contain the fire.  
  • Bank of America lowered its 2021 silver price forecast 3.9% to $27.71 per ounce. Despite this, they prefer silver due to rising demand in solar panels and growth in electrical applications.
  • Russia’s second-biggest gold miner plans to plant a forest two-thirds the size of Manhattan to comply with new legislation as President Vladimir Putin tries to curb the nation’s carbon emissions. Russian companies must plant a new tree for every tree they cut down under new legislation that started taking force earlier this year. In addition to the forest, to offset emissions, diesel-fueled power stations and other equipment will be switched to electric.

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July 9, 2021

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors