The Perfect Storm for Gold and Gold Stocks?

This Could Be the “Perfect Storm” that Pushes Gold to a New Record High

 

A “perfect storm” of surging government debt levels, plunging real bond yields, rising coronavirus cases and deteriorating economic forecasts pushed the price of gold to an eight-year high this week, and some analysts now project the metal to top its all-time high within the next 12 months.

Gold touched $1,778 an ounce on Wednesday, its highest level since February 2012 and coming within striking distance of the psychologically important $1,800 resistance level.

What drove the yellow metal’s price action this week was not just an alarming rise in confirmed virus infections—U.S. cases hit a new single-day record of more than 40,000 on Thursday—but also a weakening U.S. dollar. The greenback declined the most in three weeks as the yen and euro strengthened amid gains in global shares.

Looking more long term, gold continues to find support from negative yields, both real and nominal. The amount of negative-yielding government bonds around the world rose back above $13 trillion this week for the first time since March. The high of $18 trillion was set in August of last year.

The real 10-year Treasury yield traded as low as negative 0.66 percent on Tuesday, a level we haven’t seen since May 2013. As I’ve shown a number of times before, gold trades inversely to bond yields, and when they turn negative, it’s like rocket fuel for the yellow metal.

IMF Lowers Its 2020 Economic Growth Forecast. More Money-Printing Ahead?

Meanwhile, the International Monetary Fund (IMF) lowered its economic growth forecast for 2020. The world economy is now projected to plunge nearly 5 percent this year, a downward adjustment of 1.9 percentage points from the IMF’s April forecast.

“The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” IMF economists wrote in the June 24 report.

This could spur even more monetary and fiscal stimulus from world central banks and governments, which is already unprecedented. The Bank of England (BoE) recently added to its bond-buying program, and the Federal Reserve has signaled that it will be keeping rates near zero.

Get this: As of right now, the Fed’s balance sheet stands at $7 trillion, or 33 percent of U.S. GDP. And earlier this month, the Treasury’s public debt soared past $26 trillion, an incredible 120 percent of the entire U.S. economy.

This isn’t sustainable, obviously, and some analysts now see dollar-denominated gold hitting a new all-time high in the next 12 months, even in a risk-on environment. Both Morgan Stanley and Citigroup maintain their call for $2,000 gold by mid-2021.

London-based research firm Edison goes even further. In a note dated June 23, analysts there commented that gold should be near $1,900, “with the potential for this to rise to in excess of $3,000.”

Gold’s Best Year Ever (So Far) in Dollar Terms

So far in 2020, physical gold is comfortably the best performing major asset. It’s outperformed not just the S&P 500 but also the U.S. dollar, emerging markets, Treasuries and high-yield corporate bonds.

In fact, this is gold’s best year ever so far in dollar terms. The chart below shows you all the highest highs (the red line) and lowest lows (teal line) between January and December from the past 10 years. The yellow line is gold’s price action in 2020, and as you can see, it’s trading higher at this point than it ever has in the month of June.    

Historically, June has been a relatively weak month for gold, making it a good time to consider adding the metal to your portfolio in anticipation of seasonal asset appreciation. India, the world’s second largest purchaser of gold after China, has two big events coming up that in years past have pushed the metal’s price higher thanks to increased demand. I’m talking, of course, about Diwali and the Indian wedding season, both of which I’ve written and spoken about numerous times.

The question this year, though, is how much of an impact the pandemic will have on these huge cultural celebrations, and if gold will see a difference.

Will COVID-19 Derail the $50 Billion Indian Wedding Season?

Like the U.S., India just had its biggest one-day spike in new coronavirus cases, with approximately 17,000 reported on Thursday. The Asian country is the fourth worst affected country after the U.S., Brazil and Russia, and its death toll is the eighth worst.

Again, gold demand in anticipation of the upcoming Diwali celebration and Indian wedding season has helped prices move higher heading into August and September. Were this a “normal,” non-pandemic year, the added demand may have been such that gold could top $1,800 an ounce or more.

There are already reports of some Indian couples delaying or outright cancelling their 2020 wedding plans, not just as a precautionary measure but also to wait it out and tie the knot under more ideal conditions. Indian weddings have traditionally been grand affairs attended by large numbers of family members, a clear health risk in the age of COVID-19.

For couples who are choosing to move forward with wedding plans, there’s a new “essential”: matching face masks.  

As a result of the cancellations, gold consumption in India could potentially fall as much as 50 percent in 2020 compared to last year, from 690.4 metric tons in 2019 to between 350 and 400 tons this year, according to one forecast.

Although this may end up being the case, it’s worth remembering that gold still plays a massive role in many other corners of Indian culture. Indians still save in gold, with as much as 75 percent of Indian savings invested in the precious metal, according to Incrementum. Private households in the country are estimated to be the single largest gold hoarders in the world, with some 24,000 metric tons. That’s more than three times the amount the U.S. has in reserves.

There could also be some good news thanks to a healthy monsoon season, which begins this month and continues through September. It’s been estimated that a third of Indian gold demand comes from rural farmers, whose crop revenue depends on the rains delivered by a good monsoon.

This year the monsoon is forecast to be normal, and already Indian sugar producers are having an excellent season, with exports at a record volume for the second year in a row. I believe this is constructive for gold demand.

Fore more on gold’s seasonality, watch my video on buying the dips by clicking here.

Royalty Companies a Smart Way to Play the Gold Rally

When it comes to getting exposure to gold, my favorite way continues to be royalty and streaming companies. Industry leaders Franco-Nevada and Wheaton Precious Metals have soared over the past 12 months, with Franco up 63.6 percent through today, Wheaton up 71.6 percent.

I’m not the only one who likes these companies, though. Ray Dalio, the billionaire hedge fund manager of Bridgewater (the largest hedge fund in the world), is a big gold bug. According to Bridgewater filings for the March quarter, SPDR Gold Shares (GLD), which invests in physical gold, stood as Dalio’s second largest holding, valued at more than $600 million.

Included in his holdings are the three companies in the chart above, Franco, Wheaton and Royal Gold, with a combined value of $12.6 million. Go gold!

Mark Your Calendars!

Speaking of gold royalties, I will be participating in an upcoming webinar called “Maximizing returns and minimizing risk investing in Gold Royalties.” The webinar will be held on Monday, June 29, between 1:00 and 2:00pm Pacific time. I’ll be joined by Joe Mazumdar, editor and analyst at Exploration Insights. I hope you’ll join us! To register for this event, click here.

 

Gold Market

This week spot gold closed at $1,771.29, up $27.42 per ounce, or 1.57 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 5.15 percent. The S&P/TSX Venture Index came in up 5.56 percent. The U.S. Trade-Weighted Dollar fell 0.13 percent.

Date Event Survey Actual Prior
Jun-23 New Home Sales 640k 676k 580k
Jun-25 Durable Goods Orders 10.5% 15.8% -18.1%
Jun-25 GDP Annualized QoQ -5.0% -5.0% -5.0%
Jun-25 Initial Jobless Claims 1320k 1480k 1540k
Jun-29 Hong Kong Exports YoY -5.2% -3.7%
Jun-29 Germany CPI YoY 0.6% 0.6%
Jun-30 Eurozone Core CPI YoY 0.8% 0.9%
Jun-30 Conf. Board Consumer Confidence 90.0 86.6
Jun-30 Caixin China PMI Mfg 50.7 50.7
Jul-1 ADP Employment Change 3000k -2760k
Jul-1 ISM Manufacturing 49.0 43.1
Jul-2 Change on Nonfarm Payrolls 3000k 2509k
Jul-2 Initial Jobless Claims 1350k 1480k
Jul-2 Durable Goods Orders 15.8%

Strengths

  • The best performing precious metal for the week was gold, up 1.57 percent. Gold is heading toward $1,800 an ounce driven by fear that the resurgence in virus cases will impede the global economic recovery. Gold for August delivery rose to $1,796.10 on the Comex on Monday – the highest level since 2012. The yellow metal saw a third straight weekly gain, which is its longest winning streak since January. According to Bloomberg data, gold-backed ETFs saw a fourteenth week of net inflows.

  • The Union of Gold Producers of Russia said in a statement this week that Russian gold output in the first quarter rose more than 5 percent to 64.6 tons from a year earlier. The increase was due to a ramp up in production by smaller miners.
  • Bloomberg’s Eddie van der Walt is very bullish on gold. “A mix of slow growth, easy money and black swans can propel gold to record highs in the second half of 2020.” Gold is one of the best performing major assets in the past year and has soared by a quarter.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 1.57 percent on the net-long position of palladium futures dropping to a three-week low. Perhaps the move came on speculation that automobile sales could contract short-term with virus outbreaks in the U.S. beginning to dominate headlines. After rising to nearly $1,800 an ounce early this week, gold struggled to hold onto its gains. U.S. inflation rose higher-than-expected on Friday. The core personal consumption expenditures index rose 0.1 percent in May, up from the 0.4 percent decline in April.
  • Barrick Niugini, the operators of the Porgera gold mine in Papua New Guinea said in a statement that most of its 2,650 workforce will be retrenched in the coming weeks. The mine was put on care-and-maintenance after the government decided not to extend its special lease. Bloomberg notes the mine is a joint venture between Barrick and Zijin Mining.
  • The U.S. dollar rose on Friday as investors look for safe havens amid troubling news that coronavirus cases are surging in America. There are also doubts that a V-shaped economic recovery is far from possible. Gold and the dollar don’t often move in the same direction, and a rise in the dollar could mean a fall for gold.

Opportunities

  • Roxgold announced that its drill program at the Seguela project returned 20 meters at 28 grams per ton of gold. Tanzanian Gold Corp was up 6.3 percent in U.S. pre-market trading on Wednesday due to an increase in resources at its Buckreef gold project in Tanzania. Alexco Resource Corp announced that it is moving forward with the final development of its mines at Keno Hill and amended its silver purchase streaming agreement with Wheaton Precious Metals.
  • RBC said it remains constructive on gold mining stocks. The bank upgraded Centamin Plc to outperform and have kept Polymetal and AngloGold both at outperform. Analysts led by James Bell wrote that the macro backdrop for gold remains supportive at a time when companies have been conservative in their outlooks.
  • Harmony Gold Mining, South Africa’s top gold miner, raised $200 million through a share sale after investors backed its plan to purchase AngloGold Ashanti’s last South African operations, reports Bloomberg. CEO Peter Steenkamp said, “the successful placement is a validation of our investors’ support for Harmony’s stated strategy to safely grow quality ounces and increase margins.”

Threats

  • Capital Economics is sticking to its somewhat bearish outlook for gold. The firm projects the yellow metal to ease back for the rest of 2020 due to weak physical demand out of Asia, reports Kitco News. Chief commodities economist at Capital Economics Caroline Bain said, “although ultra-low real yields and a somewhat weaker U.S. dollar will keep the gold price elevated, safe-haven demand will be more subdued as economic activity picks up.”
  • Coronavirus cases are spiking globally, especially in the U.S. and Latin America. Chile, a top miner, has now seen nearly 260,000 cases. This could lead to mining operations being shut down again and slowing production, particularly for copper.
  • According to Black Knight Inc., the number of home-mortgages more than 30 days late rose to 4.3 million in May, up from 723,000 in April. More than 8 percent of all U.S. mortgages were past due or in foreclose last month, notes Bloomberg. This is a staggering sign of the economic downturn inflicted by the pandemic.

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 3.31 percent. The S&P 500 Stock Index fell 2.86 percent, while the Nasdaq Composite fell 1.90 percent. The Russell 2000 small capitalization index lost 2.81 percent this week.
  • The Hang Seng Composite lost 0.23 percent this week; while Taiwan was up 0.96 percent and the KOSPI fell 0.31 percent.
  • The 10-year Treasury bond yield fell 5 basis points to 0.641 percent.

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June 26, 2020

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