SWOT Analysis: Rising Inflation Could Lift Gold Prices

Monday, August 20, 2018
By Paul Martin

By: Frank Holmes
GoldSeek.com
Monday, 20 August 2018

Strengths

The best performing metal this week was palladium, up 0.52 percent after rallying hard after a six percent drop mid-week, largely on talk of trade tensions easing. Inflation is creeping into the market, which has historically been positive for the price of gold. U.S. consumer sentiment fell to the lowest level in almost a year, according to a University of Michigan report. Bloomberg writes that this could be a possible caution signal for spending following strong gains in the second quarter. The report also showed that buying conditions for large household durable goods fell to the lowest in four years, car-buying views were the lowest since 2013 and home-buying conditions are the least favorable in about a decade. Another sign of inflation is in Deere & Co.’s lower earnings due to higher freight and raw material costs. Steel prices are rising due to tariffs on imports and freight costs are up due to higher oil prices and a shortage of big-rig drivers. Bloomberg writes that “cost inflation is marring what is proving to be a strong uptick in demand for agricultural-machinery.”
· Hedge-fund manager Ray Dalio has kept his faith in the two biggest ETFs backed by gold, even as other investors have backed away, reports Bloomberg. As of the end of the second quarter, Dalio’s Bridgewater Associates had 3.9 million shares in SPDR Gold Shares and 11.3 million in the iShares Gold Trust, according to regulatory filings. Ten-year real yields are down 10 basis points since the start of the month which likely helps to stall the dollar. A stronger dollar has kept investors away from gold, which may no longer viewed as the traditional safe-haven asset. However, Rick Rule, chief executive officer of Sprott U.S. Holdings Inc. doesn’t think this trend will last. Rule said that U.S. investors “will begin to diversify their risk-off trade to include, among other things, gold” after they shift focus away from the U.S. dollar relative to other currencies.

The first bullion-backed ETF guaranteed by a government has launched on the New York Stock Exchange. Australia’s Perth Mint Physical Gold ETF (AAAU) started trading on Wednesday and allows shareholders to exchange their shares for gold and have the physical metal delivered to their doorstep by Perth Mint. Richard Hayes, the Perth Mint’s chief executive officer, said that “we believe investors will have greater confidence with the knowledge that their wealth is physically stored in one of the most secure central bank grade vaults in the southern hemisphere.”

Weaknesses

· The worst performing metal this week was platinum, down 4.83 percent as speculators increased their bearish position. The yellow metal continues to decline as gold prices fell below $1,200 per ounce this week. Gold is heading for its fifth monthly loss as the dollar continues to climb, for the worst run since 2013, writes Bloomberg. Gold traders and analysts have a bearish outlook in this week’s Bloomberg survey as the gold price sank to its lowest in more than 19 months.

· Money managers are making their biggest bets that prices will decline even further as investors are exiting gold ETFs and open interest for futures is dropping. Gold mining stocks are also falling as an index of bullion-mining companies tracked by Bloomberg Intelligence fell to the lowest in more than two years for a seventh straight loss on Tuesday. This week was the fourth straight week of commodity ETF outflows. Outflows from U.S.-listed commodity ETFs totaled $694 this week compared to withdrawals of $538 the week prior, according to Bloomberg data. Precious metals funds saw outflows of $495, compared with $399 of outflows the previous week.

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