Why gold is down for the month, but still on a long-term track to reach $2,000 an ounce

Release Date:  Friday, March 1, 2019

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Gold and Silver Prices

Gold closed lower on Friday and for the week as U.S. and global stocks boosted and the U.S. dollar found strength.

"Gold prices fell 1 percent to its lowest level since the end of January on Friday... fallen below the key 1,300 level for the first time since Jan. 28. It is down about 2 percent so far this week, its biggest fall since the week ending Aug. 17.

"'The U.S. dollar index and two-year Treasury yields have moved up over the last couple of days and these factors have prompted people to take some profits (in gold),' said Bart Melek, head of commodity strategies at TD Securities in Toronto.

"'We are also seeing a continued reaction to Federal Reserve statements where hikes are still on the menu, given that data seems to be fairly strong in the United States.'

"Better-than-expected U.S. gross domestic product data on Thursday boosted Treasury yields, making non-yielding bullion less attractive.

"The data also helped boost the dollar to a 10-week high against the Japanese yen earlier in the session.

"Higher global stocks also weighed on gold, analysts said. 'Better sentiment on the stock markets and a reluctance by the physical gold investors are weighing on its price,' Commerzbank analysts said.

Gold ended the week down $35.00, closing at $1,292.80. Silver ended the week down $0.71, closing at $15.19.

Why gold is down for the month, but still on a long-term track to reach $2,000 an ounce - Saefong

Gold is believed to reach a record high of $2,000 in the next 24 months.

"Gold prices have pulled back from a 10-month high in recent sessions, leaving investors wondering why the many geopolitical and economic issues plaguing the market haven't been able to fully support the metal's haven appeal.

"Gold notched that multimonth peak just over a week ago on the back of uncertainty linked to Brexit, the U.S.-China trade dispute, and global economic growth. But prices on Thursday suffered a loss for the month on the heels of four monthly gains-the longest upward streak since 2016.

"Prices have run up to the top end of the trading range they have held for the past five years," says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, pegging the "top end" at $1,350 to $1,400. "Without further easing in financial conditions, ramping inflation or stock market volatility, gold prices are likely to struggle at the top end of this five-year trading range," he says.

"Gold still faces supply challenges and any uptick in demand would tighten inventories.

"The gold mining sector has seen a spate of merger and acquisition activity, most recently with Barrick Gold Corp's ABX, +1.03%  unsolicited proposal to buy Newmont Mining Corp. NEM, +0.29%  in a deal that values Newmont at nearly $18 billion.

"'The M&A activity is reflective of the increasing difficulty [in] finding and mining gold reserves,' says Will Rhind, chief executive officer at exchange-traded fund issuer GraniteShares. 'The consolidation of the gold-mining sector...highlights existing gold supply difficulties and shortages, which is supportive of gold prices,' he says.

"On the demand side, central banks have been on a gold buying spree, lifting 2018 net purchases of the metal to 651.5 metric tons-their highest in more than 50 years, as geopolitical uncertainty and economic worries prompted national banks to diversify their reserves, according to the World Gold Council.

"'Central bank choices about composition of their reserves send important signals to financial markets about relative safety of currency alternatives,' says Trey Reik from Sprott, which manages the Sprott Physical Gold Trust PHYS, -0.38% 'Whenever gold allocations are on the rise, central bank authority is augmenting the [money-like qualities] of gold.'

"Carlos Artigas, WGC director of investment research, says that on an annual basis, central banks have been net buyers of gold since 2010. A recent WGC survey also revealed that almost one-fifth of central banks signaled their intention to raise gold purchases over the next 12 months.

"'Central bank buying is quite bullish as they are massive institutional players...and even a small allocation to gold can be quite significant in terms of additional physical demand,' says Mark O'Byrne, research director at precious metal brokerage GoldCore. 'Official sector gold buying does not imply necessarily that [central banks] are bullish on gold per se....It likely means that they are concerned regarding the outlook for the dollar and are reducing and hedging exposures in this regard.'

"'Trillion-dollar deficits in the U.S. under [President Donald] Trump and growing fiscal imprudence will be making central banks with large dollar reserves increasingly nervous about the outlook for the dollar,' says O'Byrne. 'A $22 trillion national debt and the lack of any will to rein in massive spending is making America's creditors nervous and...the "risk free" status of U.S. Treasuries will come into question.' That may lead to higher demand for haven gold.

"'Given the scale of the risks,' O'Byrne believes gold is 'more than likely' to climb to a record high of $2,000 within the next 24 months." ("Why gold is down for the month, but still on a long-term track to reach $2,000 an ounce," Myra P. Saefong, Market Watch, 02/28/19.)

Bear market for stocks already underway, recession coming, says Crescat Capital - Kollmeyer

Doubts about the U.S. economy points to a possible recession and a bear market for stocks may have already started.

"Investors are waking up to a rumble on the geopolitical front, as tensions heat up between two big nuclear powers, India and Pakistan.

"... Southern Asia unease to be used as an excuse for selling, something that has already been seen across global equities. Earnings disappointment and ever-present worries about the U.S. economy also get some credit for rattling investors Wednesday.

"On that last point, Fed Chairman Jerome Powell heads back to Capitol Hill ahead of more data, as big banks struggle with the debate over whether the U.S. is headed for recession. J.P. Morgan's CEO James Dimon reportedly told clients Tuesday they are bracing for a recession, just in case.

"Doubts about the U.S. and global economy color our call of the day, from Octavio 'Tavi' Costa, Crescat Capital global macro analyst, who sees a recession coming, and thinks investors are blind to the fact the bear market for stocks has already started.

"'In our view, September of 2018 marked the peak of the U.S. economic cycle. We are now seeing a typical bear market rally, and the next downward leg is likely to be just as abrupt as the first one,' Costa told MarketWatch in an interview. 'It's hard to pinpoint when exactly, but my best guess is between now and April.'

"Costa, who says he's shorting U.S. and global stocks, shared his 'deck of charts,' which back up his concerns about the U.S. and global economies. Among them, is this one that shows the widest drop in consumer confidence expectations versus the present situation since the tech bust of the late 1990 early 2000. He notes that notes that every other such drop in the past 50 years has led to a recession.

"He also highlights this next one, which shows more than a dozen major economies facing negative 30-year yield spreads vs. the fed-funds rate - a global yield-curve inversion. What that means is that short-dated bond yields are trading above long-dated ones - a move that has reliably predicted past recessions.

"Costa says bear markets tend to develop in different ways, with a few lags and fairly aggressive moves before markets calm down again. He noted that January saw the third-largest drop in history for the VIX or the Cboe Volatility IndexVIX, -1.65% which indicates investors are less fearful, but at the same time, a traditional haven in times of trouble, gold, was moving up.

"Gold and precious metals are assets he likes right now..." ("Bear market for stocks already underway, recession coming, says Crescat Capital," Barbara Kollmeyer, Market Watch, 02/27/19.)

Buying Gold In 2019? The Time May Be Right Now - Sonenshine

Gold remains a safety amid economic instability and concerns.  

"Gold has been up on the year, but if it turns out that the stock market runs low on juice, investors flocking to safety should pay attention to the precious metal. 

"Gold is up roughly 3% so far in 2019. The price of the commodity moves with inflation. The Federal Reserve has backed off of interest rate hikes in 2019 as the global economy has slowed, which enables inflation to move up slightly, in turn lifting gold prices.

"The Fed's rate-hike pause looks good for Gold, 'because one of the headwinds has been interest rate hikes, when people may sell gold and buy bonds, but now I think it's quite positive for Gold,' said Gold Fields (GFI) CEO Nick Holland. 

"The next question is whether gold prices already reflected the anticipated monetary environment for 2019. But it's still not 100% clear that the Fed will continue its dovishness, 'so if they live out what they say they're going to do, I'm cautiously optimistic we could see a [good] gold market for a while,' Holland added." ("Buying Gold In 2019? The Time May Be Right Now," Jacob Sonenshine, TheStreet, 02/26/19.)

Gold Remains An Attractive Inflation Hedge- JP Morgan - Neils Christensen

Gold is an attractive asset with higher inflation which weighs on the dollar.

"Although prices pressures have dropped as growth concerns picked up, JPMorgan is warning investors not to underestimate long-term inflation risks and to look at gold for some protection.

"In a report released last week, JPMorgan analyst John Normand said that Treasury Inflation-Protected Securities (TIPS) and gold remain the 'most durable' hedges in an environment of rising inflation.

"The comments come as inflation has fallen off the radar for most investors, who are instead focused on growing risks of an economic slowdown or even a recession.

"'Despite H1 uncertainties over growth, US inflation risks through 2020 are still worth hedging given the Fed's newish attempts to generate an inflation overshoot,' said Normand.

"He added that gold is an attractive asset because higher inflation weighs on U.S. real interest rates, which undermines the U.S. dollar.

"'When choosing inflation hedges for the next year or two, the source and the consequence of price pressures are key,' said Normand. 'For us, these include a labor market that tightens further and pushes up core and eventually headline inflation Hence the TIPS overweight. Another is that the Fed will deliberately erode real yields to spur the economy, thus undermining the dollar versus alternative reserve currencies like Gold.'

"The comments were made after gold prices pushed to a 10-month high. Although the market is off its recent highs, prices are still holding above critical support levels...

"Although the risks of an inflation overshoot remain relatively low, they are still among the top five risks mentioned by clients, Normand said.

"'Until the January 30 Fed meeting, most considered a US inflation overshoot to be a tail risk rather than a policy objective,' he said. 'The view we have been advancing for the past month is that the Fed has been slowly and subtly unveiling a regime change involving two principles: setting policy based on actual inflation rather than a forecast driven by low unemployment; and aiming for a mild overshoot of 2% core PCE to reinforce the symmetric inflation target that has been in its statement of longer-run goals since 2016.'" ("Gold Remains An Attractive Inflation Hedge- JPMorgan," Neils Christensen, Kitco News, 02/26/19.)

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