Gold – Gold Mining Shares Climbing Wall of Worry?

It is almost across the board long-time gold investors are looking for gold and shares of gold mining companies to correct after a strong first quarter. Worried about the commercial short position and over-bought technical readings and “because it has gone up” appear to be the reasoning. Perhaps there will be a pull back, but what investors forget is that bear markets teach you how not to make money in bull markets because you are so afraid of the market turning tail again. Gold investors should take note, the complete wash out in the sector over the past five years combined with the low sector market capitalization means only a small movement of capital looking to reposition into gold will push share prices higher or limit the extent of a correction. Additionally, the Gold/XAU ratio is still in the early phases of recovering from extreme levels as investors appreciate management efforts on capital discipline and cost controls enacted over the past couple of years. Currently at 17.57, the Gold/XAU ratio it could easily drop in half from here to get closer to historical averages. Take a look at the chart below.

Gold-XAU Chart

The XAU Index is a capitalization-weighted index featuring sixteen widely held securities in the gold and silver mining and production industry or companies investing in such mining and production companies.

What is Driving Gold? Is it the Fed? The Presidential Election? Weak Global Economy?

It is all of the above. The Federal Reserve’s lift off interest rate increase no longer overhangs the gold market and now the Fed’s credibility is being questioned with its ability to “normalize” rates being viewed by many as a fallacy because it is captive to weakening financial asset prices. Now the prospect for negative rates spreading from Japan and Europe to the U.S. is starting to become a real possibility if the global economy fails to accelerate over the next 12 months. Another factor creeping into the gold market is the uncertainty surrounding the presidential election in the U.S. The world view of Hillary Clinton and Donald Trump is not favorable. Additionally, confidence in equity markets is beginning to wane and the Dow/Gold ratio appears to have reversed trend pointing to gold outperforming equity markets. Recall Dow/Gold ratio has historically bottomed at 1:1 when confidence is lost in financial assets. See Dow/Gold ratio chart below.

Dow-Gold Chart

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

Negative Rates Prompt German Insurer Munich Re to Hold Gold

Faced with a negative interest rate environment in Europe, Munich Re has allocated 1.4% of its €231 billion portfolio to gold bullion and recently added physical cash. Munich Re’s Chief Executive Nikolaus von Bomhard commented regarding ECB policy, “The side effects of the ECB policy is of course now having quite devastating consequences. I think they are solving the wrong problem with the wrong remedies.” Von Bomhard concerns speak to the uncertain outcome of extreme monetary policies by Western central bankers. The risk/reward of having cash balances in banks with the risk of bail-ins or bank failures with zero to negative interest rates clearly favors having physical cash and gold in von Bomhard’s opinion, one that may gain momentum across Europe the longer negative rates persist.
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India’s Gold Monetization Scheme Failing…as Expected

“The country’s finance minister announced a scheme to monetise the gold holdings of India’s families, but the finance minister back at home, the housewife, is having none of it…’I am not even able to convince my wife to part with her jewellery, which she hardly uses,’ one official reportedly said at the meeting.” The effort to thwart gold imports and thus limit the strain on India’s current account is failing as only 3 tonnes have been deposited out of an estimated 20,000 tonnes held in country over the past year.
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World Gold Production by Country

A couple of comments on world gold production. China miraculously remains in the top position without one Chinese Mining company among the top ten gold producing mining companies in the world. If you read a bit of skepticism into that comment, you would be correct. Chinese and Russian gold production doesn’t hit world markets as the gold is consumed within the countries, with both central banks active in purchasing gold for their own accounts. South Africa once produced 1500 tonnes of gold per year going back to the 1970’s. We are still of the opinion world gold production is set to decline 20% or more over the next 5 to 10 years.

Top 10 World Gold Production Chart

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