Swot analysis: gold miners trading at historically cheap levels

Weaknesses

• The worst performing metal this week was palladium, down 29.85 percent.  As investors scramble for liquidity in this market panic, they are selling gold. Gold jumped above $1,700 an ounce early this week, then fell below $1,600 an ounce on Thursday and ended the week at $1,529.83. The yellow metal has been one of the only assets to outperform, leading to investors selling to take profits or were subject to margins calls. ABM Amro issued a cautious price forecast of gold averaging $1,500 an ounce in the second quarter of this year.




• BASF announced that it has developed tri-metal catalyst technology that would enable partial substitution of palladium for cheaper platinum in light-duty gasoline vehicles, reports Bloomberg. Although positive for platinum demand, this is negative for palladium, whose recent rally is largely due to demand for use in catalysts. Palladium was one of 2019’s best performing commodities, but it has been caught in the rout.
• The Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis could all face trouble collecting reliable figures on key data including jobs and inflation, according to Bloomberg. Because of the coronavirus impact, Americans and businesses might be unwilling to respond to surveys and surveyors might find stores closed or be unable to work from home.

Opportunities

• Suki Cooper, precious metals analyst at Standard Chartered Bank, said in a Bloomberg TV interview this week that “global monetary conditions are going to be key for the next move higher in gold.” This comes as central banks globally prepare fiscal stimulus and additional interest rate cuts to support economies. UBS raised its 2020 average gold price forecast to $1,650 an ounce, up from $1,600 an ounce previously. They also think that gold has the potential to test the high $1,700s in the first half of this year. Australia & New Zealand Banking Group Ltd. said in a report this week that there’s a high probability of gold reaching $2,000 an ounce in the second quarter depending on the extent of the coronavirus impact, reports Bloomberg.
• Scotiabank analyst Tanya Jakusconek wrote in a note to clients this week that gold miners are trading at levels cheaper than those seen in the 2008 financial crisis. Gold equities are trading at around a 16 percent discount to gold prices – lower than the 10 percent discount in 2008. Gold miners could be one of the few sectors to report positive quarterly earnings next month, as spot prices have averaged at least $100 more per ounce than in the fourth quarter of 2019. Desjardins wrote in a note than linear regression suggests a further 12 percent increase to cash flow in the first quarter for gold miners. Oil crashed this week, which could be a positive for miners, as fuel is a big cost and lower prices will increase their margins.

• How might gold perform during this market crisis? Looking back to the 2008 financial crisis, gold rebounded and hit bottom long before the S&P 500 did. From mid-July 2008 to October 24, the GLD fell nearly 30 percent and the GDX sank 70 percent. However, the GLD slide was mostly over by September 2008, before Lehman Bros. even came down. From October 24 to March 6, 2009, the S&P fell another 21 percent, after falling 40 percent the six weeks prior, while GLD surged 34 percent and the GDX more than doubled, writes Jed Graham in Investor’s Business Daily. This could mean that again, gold could recover before the wider stock market this time around. The surge in retail buying of physical metals this week with the drop in prices may signal retail demand for gold mining companies could be next.

Threats

• The dollar rose as investors scrambled to get their hands on cash in what some are calling an irrational “fear trade”.  If the stress in the dollar funding market continues, it could lend further support for higher prices. A stronger dollar has historically been negative for the price of gold. This week the historically liquid bond market turned illiquid. Buyers had been steadily pouring money into bond and municipal bond mutual funds for over a year, then abruptly pulled back over the last two weeks. For municipal bond funds, their yields which are typically tax-free are now trading above Treasury bond yields. Even bond ETFs that just buy U.S. Government debt are redeeming units at significant discounts to their net asset value if an investor is demanding liquidity.
• The Fed announced $1.5 trillion of liquidity injections in the Repo markets. However, this is concerning since the balance sheet last stood at a whopping $4.24 trillion. For all practical purposes, QE has just started again with the Fed buying $33 billion of Treasuries across the curve just on Friday. Because of these liquidity concerns, the latest reading for Bloomberg Economics’ U.S. recession probability model shows the chances of a downturn in the next 12 months rising to 53 percent.  Expect even more stimulus should a recession emerge.
• The non-partisan U.S. Government Accountability Office found that there are more than 215,000 abandoned hardrock mine sites that pose either a physical safety risk or an environmental risk to the public. Taxpayers could face an $11.6 billion cleanup bill on these mines, on top of the $1.9 billion that was spent from 2008 to 2017 to clean sites. Senator Tom Udall released the report to underscore why Congress must act swiftly to update the outdated 1872 hardrock mining law that keeps mining companies from being liable for cleaning mine sites.