Gold SWOT: Gold Is Headed For the Longest Run of Gains In More Than a Month

Strengths

• The best performing precious metal for the week was palladium, up 6.34%, despite hedge funds increasing their bearish weighting on palladium to an 18-week high. The first U.S. Bitcoin-futures backed exchange-traded fund (ETF) is turning into a target for crypto bears. Short interest in the $748 million ProShares Bitcoin Strategy ETF (ticker BITO) as a percentage of shares outstanding is nearly 11%, close to the highest since the fund’s October 2021 inception, IHS Markit data show. Meanwhile, the fund’s ratio of open interest in bearish put contracts to call open interest has soared since mid-April to all-time highs. That suggests that crypto bears are flocking to BITO as a way to short sell the token as they wait for the rollout of inverse Bitcoin ETFs, which would bet against it. .
• Guggenheim Partners Chief Investment Officer Scott Minerd said he expects Bitcoin to fall to $8,000 and that cryptocurrency has become a market of “a bunch of yahoos.” “Bitcoin and any cryptocurrency at this point has not really established itself as a credible institutional investment,” Minerd said Wednesday during a Bloomberg Television interview from the World Economic Forum in Davos, Switzerland. “Everything is suspect.” Minerd said his firm bought Bitcoin at $20,000 and sold when it reached $40,000. Guggenheim no longer holds Bitcoin. If the firm were to take a position it would be to short the digital token, he said.
• India’s central bank’s gold reserves are up 9.4% on year at 760.4 tons, Swansy Afonso of Bloomberg reported. The Reserve Bank of India boosted its gold holdings by 65 tons in the year ended March to 760.4 tons, according to the central bank’s annual report. NOTE: The central bank boosted its gold reserves for a fourth year. Of the 760.4 tons, about 295.8 tons are held in India as backing for notes issued and the rest is held overseas as assets of the banking department, the Reserve Bank of India (RBI) said in the report.

Weaknesses

• The worst performing precious metal for the week was platinum, but still up 0.35%. A reluctance by precious metals traders to handle Russian-produced palladium is creating an unusual and persistent dislocation between the world’s two main markets. In the European hubs of London and Zurich, traders can select the origin of metal they receive, while those taking delivery of a New York Mercantile Exchange futures contract don’t get the same choice. The threat of receiving Russian ingots has helped push New York futures to about a $30-an-ounce discount to similarly dated forwards in London and Zurich.
• The Biden administration on Wednesday is outlining new pollution restrictions that would thwart a long-stalled plan to mine for gold near Alaska’s Bristol Bay. Under the proposed requirements, the Environmental Protection Agency (EPA) would broadly bar developers of the planned Pebble Mine from disposing waste near the site because of the potential harm to the area’s thriving, $2 billion salmon fishery.
• The U.S. diesel price jumped Monday to $5.57 a gallon, up from $3.25 a year earlier, according to the Energy Department's weekly survey, although big trucking operations have some protection from sudden price surges through contracts with suppliers. In the U.S., trucks and trains are the biggest diesel users but mining companies can also face headwinds. More than 60% of U.S. mining and fuel production equipment is diesel-powered. Diesel prices will probably remain high for longer than gasoline prices because diesel inventories have fallen to multiyear lows, said Patrick De Haan, head of petroleum analysis for Gas Buddy. Energy Department data released Tuesday showed inventories of distillates, a category that includes diesel, sit 22% below the five-year average for this time of year.

Opportunities

• John Authers penned an excellent note this week on how investors might position their portfolio with regards to inflation. It’s well known by now that protracted high inflation is really bad for both stocks and bonds, reports Bloomberg, with a fascinating demonstration coming from an exercise by Jim Reid of Deutsche Bank AG. To summarize, Reid and his team divided the stocks and bonds of 15 different countries into valuation deciles. A low number suggests both stocks and bonds look universally cheap, while a high one suggests both look too expensive. It’s inflation that makes both cheaper at once, and the lack of it that allows them to grow more expensive together. The higher the valuation, the lower the subsequent returns are likely to be. The chart below shows that long-term assets are now as expensive as they have been in more than two centuries, the article explains. The last great inflation period ended in 1981 with stocks and bonds as cheap as they had ever been. So, the current reading suggests neither stocks nor bonds are going to fare well over the next several years. Authors cites research that suggests commodities and precious metals tend to produce better real returns during periods of high inflation.

• Gold is headed for the longest run of gains in more than a month as investors sought safety in the haven asset amid disappointing economic data. Sales of new U.S. homes plummeted in April, falling well short of all estimates, dented by the combination of high prices and a steep climb in mortgage rates. Meanwhile, a gauge of business activity settled back to a four-month low in early May as costs ballooned and high selling prices tempered demand at service providers.
• It is important to note that B2Gold, a Canadian mining company listed on both the Toronto Stock Exchange and the New York Stock Exchange, has made an offer to buy the Australian gold mining company Oklo Resources for AUD0.1725 per share, valuing the company at AUD90 million (nearly $64 million). The bid price placed a 103.92% premium on the valuation of Oklo with the shares closing up 90.79% for the day. The acquisition of Oklo is expected to provide B2Gold with an additional landholding of 1,405 square kilometers covering highly prospective greenstone belts in Mali, West Africa, including Oklo's flagship Dandoko Project (550 square kilometers) but illustrates how the extreme disconnect between where junior exploration and mining companies are trading and the recent 100% premiums to acquire them. The major mining companies recognize they can buy the asset cheaper than they could do the exploration and development work themselves to have the asset at the current state of development.

Threats

• China will allow foreign institutional investors to trade bonds on its smaller exchange market in its latest step to attract more capital inflows by opening its financial markets, after a record selloff of Chinese holdings by foreign investors. Qualified foreign institutional investors, which can include central banks, sovereign funds, commercial banks and pension funds, will be allowed to invest in bonds on the exchange market, the People’s Bank of China (PBOC) said in a statement published on its website. The move would “help expand capital inflows to China,” it added. In addition, this could be competition for the dollar, if yields in Chinese debt can establish a stable market.
• After falling more than 2 million ounces off the mid-April peak, global gold ETF holdings ticked higher late last week as equity markets came under further selling pressure. Nonetheless, around 5 million ounces of new ETF holdings created so far this year likely remain underwater at gold prices around current spot levels. This will remain a major overhang in the coming weeks the interplay between potential ETF outflows and Asian physical dip-buying keeping prices in a range averaging between $1,850 an ounce and $1,800 an ounce in the coming weeks. Upcoming economic data and the next Fed meeting will still way heavy, but gold has remained resilient, and the U.S. dollar fell hard this week.
• Zimbabwe is using its gold and platinum resources to access credit lines from abroad, as the southern African nation saddled with $13 billion of debt is ineligible to borrow from international financial institutions. “We have some structures where we are able to access credit lines from abroad and certain banks using our gold,” according to a transcript published Monday of remarks Finance Minister Mthuli Ncube made to lawmakers May 19. “The gold is supporting access to those credit lines that we can borrow and support projects. We also have some credit lines that are supported by platinum.”  If their counterparty is China, this could be a cheap way to acquire resources on debt for commodity settlement.