Gold SWOT: Gold Hit Its Highest Level Since September 2020

Strengths

• The best performing precious metal for the week was palladium, up 26.18% on the June 22 future contract, as Russia’s invasion of Ukraine raises concern on disruption of world supplies. The Bank of Russia said it will start purchasing gold again, just under two years after it ended a long-running buying spree that helped prop up bullion prices last decade. The central bank will begin buying gold again on the domestic precious metals market, it said in a statement. The move comes after the monetary authority and several of the country’s commercial banks were sanctioned in response to Russia’s invasion of Ukraine. The Bank of Russia spent six years rapidly accumulating gold, doubling its holdings and becoming the biggest sovereign buyer.
• Gold headed for its biggest weekly gain since May, lifted by demand for haven assets as Russia escalated the conflict in Ukraine. Prices for the precious metal climbed amid falling Treasury yields, after earlier spiking on news that Russia had attacked Europe’s largest nuclear power plant. Investors are weighing the economic fallout from Russia’s invasion of its neighbor, which is disrupting flows of energy, grains and metals. The resulting surge in oil prices has stoked concerns about global growth and inflation risks.

• Gold has historically performed well in times of not only higher inflation but also rising rates, according to the World Gold Council (WGC). For the past four Federal Reserve tightening cycles, between February 1994 and December 2015, the yellow metal underperformed in the months leading up to the Fed’s first-rate hike but then outperformed U.S. stocks and the dollar six months and one year following liftoff.

Weaknesses

• The worst performing precious metal for the week was gold, but still up 4.52% on the April 22 future going into the closing hour of trading. Russian supply disruption on commodities will create operational bottlenecks. Russia represents 40% of global palladium mine supply, 30% of diamonds, 15% of rhodium and platinum, 15% of global aluminum supply, 6-8% of nickel, 5% of copper, 10% of gold and 17% of natural gas.
• Impala Platinum reported disappointing first half 2022 results with cash generation missing consensus by R9.0 billion. The miss was driven by a 20% worse than consensus EBITDA of R24.0 billion. The poor EBITDA performance was due to a combination of worse than consensus margin contraction and lower than expected sales volumes with stock adjusted group unit costs increasing 17.2% year-over-year to R16,756 per ounce. As a result, headline earnings per share (EPS) of ZAR16.90, was 22% worse than consensus.
• FTSE 100 gold producer Polymetal lost half its market value on Monday as the west ramped up sanctions on Russia over its attack on Ukraine and one of its biggest shareholders prepared to sell. Shares in the London-listed company, which operates eight mines and a state-of-the-art processing plant in Russia and Kazakhstan, dropped 56% to 351.2p, its lowest level since listing in London more than a decade ago. Norway’s sovereign wealth fund, one of Polymetal’s top 10 shareholders, said it will dump all its Russian investments as part of a wider package of support for Ukraine.

Opportunities

• Perseus Mining announced it intends to buy Orca Gold, which owns 31.5% of Montage Gold. Montage is led by former executives of Red Back Mining that owned the Tasiast and Chirano gold mines in Mauritania and Ghana, respectively, before being acquired by Kinross Gold for $7 billion in 2010. Key members then founded Orca Gold. Earlier this month Montage announced results of the feasibility study on the Kone Gold Project in Cote d’Ivoire.
• Sibanye Stillwater Ltd. expects palladium prices to moderate as the market gets more clarity on the reality of Russian supply disruptions following the invasion of Ukraine. Palladium surged about 45% this year. Russia produces almost two-fifths of the world’s supply, which is mainly used in devices that curb pollution in gasoline-powered cars.
• According to JPMorgan, gold’s year-to-date decoupling with real yields as well as a continued elevated level of Russian risk premium in the coming quarters, means a substantial premium should be sustained much longer, blunting gold’s fall amidst forecasted higher rates. Consequently, last week the group boosted its second-quarter gold price forecast by 12% to $1,850 per ounce and increased its full-year 2022 average by 11% to $1,808 per ounce.

Threats

• Kinross has elected to suspend operations at its Russian assets as a result of the ongoing invasion of Ukraine by Russia, and it's in the process of ramping down mining operations at Kupol and all activities at its Udinsk development project, which this year included work to complete feasibility study in the third quarter. Kupol was expected to contribute 350,000 ounces of production in 2022 (13% of total anticipated production), which represents approximately $200M in cash flow.
• Russia-focused miner Polymetal suspended its costs guidance for 2022, as the war in Ukraine and the resulting sanctions spreads uncertainty for miners. "We are shocked and appalled by the events going on in Ukraine," Polymetal chief executive Vitaly Nesis said. Polymetal maintained its production guidance, and said operations were not likely to be affected, but warned of the economic uncertainty spread by the conflict. "The current devastating conflict in Ukraine and related economic and political developments are likely to require a lot of management efforts to maintain Company performance," Polymetal said.
• Gold ETF holdings currently sit at 100 million ounces, unchanged from one month ago but down from all-time highs of 111 million ounces back in the fall of 2020. Net investor positioning has increased to 28 million ounces from 25 million ounces one month ago but is still down from a high of 39 million ounces back in February 2020.