Is Silver Price Poised For A Rebound?

Strengths

·         The best performing metal this week was silver, down just 1.34 percent. Both gold and silver stabilized by Wednesday, after real yields surged about 9 basis points the first few days of the week, and then largely traded sideways the rest of the week. Despite the dollar the interest rates continued higher, but at a slower pace.

·         During the first quarter of 2018, demand for gold jewelry was up 7 percent, totaling 187.7 tons. Chinese jewelers said they are working to attract a younger, wealthier generation of customers by expanding their collections of gold jewelry. According to Seeking Alpha, Chinese investors are turning to bullion as an economic hedge against political tension, with first-quarter demand at 78 tons.

·         Bloomberg reports that the world’s biggest farm machinery maker, Deere & Co., dropped early Friday morning after reporting disappointing first-quarter earnings and saying that it will increase prices due to higher raw material and freight costs. Sam Allen, Deere & Co CEO said that the company is grappling with higher expenses. Here we find an “Easter Egg” in this press release where a company, literally at the bottom of the food chain, opining on passing its input costs and higher delivery costs on to the base of the food growing chain. Farmers will now need higher retail food prices to recover their expenses too. Sounds like the virtuous inflationary cycle is being unleashed upon us.

Weaknesses

·         The worst performing metal this week was platinum, down 3.78 percent and never closed a trading session with a positive print. Bloomberg reports that gold posted its biggest weekly drop since December due to a stronger U.S. dollar and the 10-year Treasury yield piercing 3 percent. Data shows that retail sales rose for the second straight month in April and the Empire State Manufacturing Index rose this month, both of which point to an improving economy.

·         Reuters reports that gold fell to a 2018 low as the dollar continued to rise. The dollar has climbed nearly 4 percent this quarter on the heels of expectations that the Fed will raise interest rates later this year, according to media.

·         Detour Gold announced that its CEO Paul Martin will retire on June 1 and will be replaced with Michael Kenyon. While Detour is in the penalty box, the retiring of its CEO likely does not mean it’s time to load up on the stock at current gold prices. While management set expectations too high perhaps, it is the asset that did not perform, and analysts have free cash flow going to nil for the second quarter and the third quarter of 2018.

Opportunities

·         The SPDR Gold Shares ETF saw $396 million of inflows in the first quarter this year, boosting holdings to its highest level since 2013. Bloomberg writes that top hedge-fund managers John Paulson and Ray Dalio have kept their faith in bullion after a strong first quarter. Paulson & Co. had 4.32 million shares in SPDR Gold as of March 31, and Bridgewater Associates also maintained its stake in the second largest bullion-backed ETF.

·         Credit Agricole strategists Valentin Marinov and Manuel Oliveri wrote in a note this week that the dollar’s recent rally has “pressured gold to levels where it is a worthwhile investment” with limited downside risk, reports Bloomberg. The gold-silver ratio shows that an ounce of gold can buy you 79 ounces of silver, compared to the average of 63 ounces since 1994, which indicates that silver is poised for a rebound. Silver could rise at a faster rate than gold due to stronger industrial demand and the Chinese middle class boosting demand for silver jewelry, writes Bloomberg Intelligence analyst Eily Ong.

·         Bloomberg reports that Zimbabwe is set to unveil a program in three weeks to boost gold production, with output forecast to rise 15 percent to 30 metric tons this year. The southern African nation is home to the second-largest deposits of platinum group metals plus substantial deposits of chrome, lithium, coal and iron ore. The plan, called Vision 2030, implemented by the government, would help miners increase production over the next 12 years in an effort to build Zimbabwe’s economy.

Threats

·          According to ABN Amro’s Georgette Boele, a gold price below $1,250 per ounce is an “opportunity to position for higher gold prices next year.” ABN predicts that 10-year Treasury yields will rise to 3.2 percent before year-end and that the Fed will hike rates another 75 basis points this year.

·         Bloomberg reports that institutional prime money funds drew a net $8.1 billion in the week ended May 9, to the most since mid-2016, which is a signal that repatriated profits from U.S. companies are ending up in money-market funds, after last year’s tax overhaul. Much of the money held overseas is thought to be already held in dollars, but that might not be the case considering the 4 percent rise in the dollar this quarter coincides with the surge in money market flows.  Thus, the U.S. dollar could continue to surge due to investors focusing more on the short-term upside. Richard Benson, head of portfolio investments at Millennium Global, said that “the very slow and gradually widening interest-rate differentials against the euro have now reached a tipping point where that is very powerfully positive for the U.S. dollar.”

·         Glencore is being investigated by the U.K.’s Serious Fraud Office on bribery suspicion over its work with Israeli businessman Dan Gertler in the Democratic Republic of Congo, reports Bloomberg First World. Goldcorp Chairman Ian Telfer predicts that the world has reached peak gold supply and mine production will continue to fall, reports Seeking Alpha. Telfer said, “Are we not looking for it? Are we bad at finding it? Or have we found it all? My answer is we found it all. At $1,300/ounce gold, we found it all.” Shrinking gold supply could be positive for the bullion price, while it could be negative for the larger gold mining companies.

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