Is The Dollar Near Its Peak?

Strengths

·         The best performing metal this week was platinum, down just 0.04 percent as Impala Platinum announced it would need to slash 13,000 jobs in a restructuring move aimed at boosting income. Although gold is headed for a fourth weekly loss, the gold price rose on Friday after hitting its lowest in over a year when the U.S. Labor Department reported that total nonfarm payroll growth missed expectations. Nonfarm payrolls advanced 157,000, which was below estimates of 193,000. Gold rallied as much as $10 intraday on the news.

·         Bloomberg reports that manufacturers are slowing production due to ongoing global trade spats. Reports this week showed that factory activity in the U.S, Europe and the Asia Pacific region slowed in July. Additionally, the fewest number of companies said that new orders are getting better since November 2016.

·         The Perth Mint released figures for the month of July showing sales of 29,921 ounces of gold coins and bars, up from 16,847 in June. Silver sales also rose last month to 486,821 ounces, which is close to double the 229,280 ounces sold in June. The World Gold Council’s (WGC) chief market strategist, John Reade, said this week that “we may be underestimating how quickly gold mine production will decline over the next five years.” The WGC says that discoveries have been few and far between, overall operating costs are rising and political risks have grown in prospective regions. Slowing gold production could tighten supply and increase demand for the yellow metal.

Weaknesses

·         The worst performing metal this week was palladium, down 1.45 percent as Norilsk Nickel reported palladium output jumped 40 percent quarter-over-quarter. Bloomberg’s weekly survey shows that gold traders and analysts were overall neutral on the yellow metal this week, which was the largest proportion of neutral positions in data going back to April 2015. Gold is heading for its fourth monthly drop and the longest streak since 2013, as investors favor the dollar, reports Bloomberg. The yellow metal’s volatility is near the lowest since January and has been trading in a narrow range for several months now. Ole Hansen, head of commodity strategy at Saxo Bank, said that “gold remains stuck in a relative tight range.”

·         This week Vanguard announced that it is restructuring and changing the name of its $2.3 billion Vanguard Precious Metals and Mining Fund, reports Kitco News. The fund will be renamed the Vanguard Global Capital Cycles Fund and will reduce its exposure to mining stocks to just 25 percent from 80 percent. This move shows that negative sentiment and bearishness on gold and precious metals has hit a bottom, as Vanguard is one of the largest fund companies.  Its rotation out of gold mining stocks could lead to some near-term weakness in share prices but could certainly be a buying opportunity as well.  In terms of timing, Avi Gilbert, creator of Elliotwavetrader.net, noted “You don’t see these types of moves at market tops.”

·         Remember that popular idiom often espoused that “there is no inflation”? Cheesecake Factory shares fell 14 percent one day this week due to second-quarter earnings results missing estimates and lowering full-year profit forecasts, reports Bloomberg. The company said that increases in minimum wage pushed labor costs up to almost 36 percent of revenue. 

Opportunities

·         UBS writes that gold shorts reached an all-time high this week of 20.80moz, while gold net longs declined. BMO Global Commodities Research emphasizes that investors should be wary of trend complacency when it comes to the gold market.  BMO notes that the warning signs are in place for a correction, as the last time consumer confidence was this high was in 2000, just before the dotcom bubble burst.  With confidence at multi-year highs and gold price volatility trading below the VIX Index, BMO adds that investors are reluctant to appreciate that China is now gearing up for a prolonged period of trade friction, and dismissing optionality around potential macroeconomic shocks.

·         PIMCO writes that the outlook for gold is brightening. “Falling gold prices in the absence of rising real yields indicate that gold has cheapened relative to other U.S.-dominates flight-to-quality assets, like TIPS and Treasuries.” Too much emphasis is being placed on the dollar and many are saying that the greenback might have peaked. Bloomberg reports that Morgan Stanley, State Street Corp., and Wells Fargo are just a few of the big companies saying that the dollar is near its peak after gaining around 5 percent since mid-April. Michael Arone, chief investment strategist at State Street Global Advisors said in an interview with Bloomberg that “all of a sudden the popular trade is to be long the dollar.”

·         Northern Empire Resources will be bought out by its largest holder Coeur Mining in a deal valued at around $90 million for its land package in Nevada, an 18-percent premium to the stock’s closing price on Wednesday.  It’s refreshing to see some companies “get it right” now, and that all the cheap assets are going to be bought up by private equity, which was active again this week. Golden Star Resources Ltd. announced that it has entered a partnership with La Mancha Holdings, a private gold investment company. The deal could help push Golden Star to be a leading African gold producer with La Mancha investing around $125 million in cash through a private placement. La Mancha paid a 14 percent premium to the share price of Golden Star and also agreed to a two-year equity lockup. 

Threats

·         South African gold producers face continuing troubles and setbacks. The South African National Union of Mineworkers said this week that they are making no progress with employers regarding wage increases. Gold Fields’ South Deep Mine, which is over 3,000 meters below the ground, is not making the company any money. Although the mine could produce for 70 years and is built to target the world’s second largest known body of gold-bearing ore, the cost and technical challenges of working so far underground have hindered production. Bloomberg writes that Gold Fields has consistently missed production targets and the company has already spent around $2.3 billion on the mine. This week the African National Congress in South Africa decided to amend the constitution to allow land expropriation without compensation, which has increased concern for investors over the political implications of growing land redistribution.

·         The yield of 10-year Treasury notes climbed above 3 percent for the first time since June, as the Treasury Department announced it would boost the amount of long-term debt it sells to $78 billion this quarter, up from $73 billion the previous quarter, according to Bloomberg. Some analysts say the fiscal outlook is deteriorating and political risk is looming over the dollar. Liz Capo McCormick of Bloomberg says that “U.S. Treasury Secretary Steven Mnuchin appears to be pulling off a bit of a magic trick – revving up debt issuance and not having to really pay up to do it.”

·         On Friday, China announced plans to impose tariffs on an additional $60 billion worth of U.S. goods. Part of that includes a 25-percent tariff on imports of American liquefied natural gas (LNG). This is the first time fuel has been included in the growing U.S.-China trade war and could have serious implications for U.S. producers of LNG. As Russia is set to launch a new pipeline of gas into China in 2019, long-term contacts for imports of LNG from the U.S. could be less attractive to Chinese companies.

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