UBS: More interest in #Gold now than for past 2 years, Viewed as thefinal financial market hedge

The main buyers of gold, at least until the break of its 200-day moving average at $1130 last Wednesday, were not traditional commodity players. Rather, it was the wider macro community

- US market participants friendly to gold, but are observers rather than active players  

- Gains led by non-traditional players

- More interest in gold now, and questions about it, than for the past 2 years

- Viewed as the final financial market hedge

- Vol no longer cheap, risk reversals up to 2.5 for calls, matching the 2011 high

- For now the runup looks overdone, but buy dips

https://neo.ubs.com/shared/d1m9vAR3xrX5aN

I spent last week in the US, and the topic of conversation was gold, gold and more gold - from current clients, clients that haven't been active since the tail end of the bull run, clients of my FX/equity/rates colleagues, and potential clients. In other words, everyone wanted to talk about gold. I haven't seen such interest in years.

Why the interest? The short version

Gold is currently viewed as the final financial market hedge. US data is deteriorating and the Fed won't be raising rates any time soon; China is set to contract further; CNY devaluation will continue and encourage a move into gold; negative interest rates in Europe, Switzerland and Japan make gold relatively more attractive; real yields are falling; nominal yields remain low; gold positioning is light, gross shorts still relatively high.

Given all that, there's a lot of buyers, right? Wrong: many expressed the view that they'd prefer to wait, miss the early rally and buy into momentum later on.  

Why the hesitancy? The short version

Those who are hesitant to jump in argue that, technically, this is still a bear market for gold; that the US isn't going into recession, indeed raised rates in December, and the potential for a reversal of that hike is very low; that gold (ETF) buyers have become more fickle in recent years; that physical demand is tame; that there's no inflation and little potential for it; that gold couldn't hold onto any upside moves in 2015; that in a commodity bear market, the recent rally only makes gold look very expensive; that the gold/oil ratio is too high.

These are all reasonable arguments, but the factors pushing investors into gold are considerably stronger. The 2015 price bursts were predominantly rooted in positioning, with shorts very extended and net length at low-single-digit levels. The current rally hasn't been driven by short-covering, and in fact gross shorts still remain quite high,  13.9 moz as of Feb 2, down from a high of 19.2 moz in early December but very elevated compared to the  weekly average of 6.2 moz during 2009-2011. Also net long positioning at 8.9moz is far from frothy.

Who has been buying gold? Observe the changing trends

The main buyers of gold, at least until the break of its 200-day moving average at $1130 last Wednesday, were not traditional commodity players. Rather, it was the wider macro community, which has predominantly expressed its views through long-dated (6m+) options or GLD options. Traditional players became much more active upon the break of the 200 dma and the psychologically important $1150 level. Repeatedly in meetings last week we encountered would-be participants who were happy to miss out on the early stages of the rally and buy into momentum later on. ETF inflows have been very large, 3.4 moz year-to-date. To put this into context ETF holders were net sellers last year totalling 4.2 moz. Also worth noting here is that the ETF buying hasn't just been GLD led – the GLD has seen inflows of 1.96 moz and the rest has emanated from European contracts.  

On a much smaller scale, we've seen longer-term holders buying back calls as well as private banks buying physical gold and also returning interest in fully allocated, segregated gold - the ultimate safe-haven trade. None of these have been in tremendous size, but what matters is the trend change. Currently the gold market is littered with changing trends – factors on their own which would not raise must attention, but put them together and they add up to a considerable alteration in market  dynamics. That makes me sit up and pay attention.

Despite a contained rally in January, February's move looks excessive

Will #Gold & #Silver be 2016's outperforming sector?

Light at the End of the Tunnel?

Gold's correlation to stocks decreases during economic contractions and gold's correlation to other assets remains quite low; in contrast, stocks generally increase their correlation to risk assets during these periods.

This comes from advisors at Canaccord Genuity's Vancouver office. 

Gold and Silver: An outperforming sector for 2016?

·         January 2016: In just 5 days, investors bought 26.8 metric tons of bullion through exchange-traded products backed by the metal, the most since 2015 (source: Bloomberg).

·         Gold and silver demand is off the charts; the U.S. Mint sold nearly as much gold on the first day of 2016 as in all of January 2015.  American Eagle silver coin sales jumped after the U.S. Mint said it set the first weekly allocation of 2016 at 4 million ounces, roughly four times the amount rationed in the last five months of 2015 (source: Reuters).

·         Gold has risen 3.1 percent so far this year.

• HSBC believes that gold has "shrugged off" two bearish developments, a strong dollar and weaker commodity prices, announcing that they remain bullish on the precious metal. The group sees good emerging market demand, eventual dollar declines and central bank accumulation helping gold this year.
• The FTSE/JSE Africa Gold Mining Index, which rallied 20 percent this year, has had the best start since 1995 (source: Bloomberg).

·         Global economic landscape for 2016 is looking ripe for further deterioration, increases in credit defaults and a "beggar-thy-neighbor" policy of rampant currency devaluations.

·         Equities look like they are rolling over into a secular bear versus gold which has bottomed and is likely resuming its bull market run.

·         Gold will resume its safe-haven status as global investors seek insurance and a potential hedge against the frailties of the monetary system.

·         Gold's run will strengthen from a currency play stance and not from traditional commodity supply & demand movements.

While the financial media's "talking heads" are busy trying to assure investors that corrections in the market are normal and to "stay the course", we are advising investors to include an allocation to gold within the portfolio.  We are not going to pretend that we can predict market movements; however we are steadfast in our belief that the volatility we are seeing is not going to stop anytime soon.  From our macro perspective, investors need to act as defensively as possible, thus if you are not selling your long equity positions you are employing strategies into the portfolio to mitigate potential losses - gold exposure can do that.  We recommend buying the physical and top-tier gold mining shares.  Mining shares are leveraged to the gold bullion price and due to a massive correction in the precious metals equities sector over the past four years; the opportunity for tremendous upside is present.  We recommend a gold portfolio weighting which is large enough that it can mitigate losses from the other asset classes.  We have created a list of gold mining companies which we think are representing above average opportunities in the sector. Our key criterion for recommendation looks at: share price depreciation from former highs, previous financing levels, successful project advancement and development and most importantly, all in sustaining costs (AISC). AISC essentially refers to the overall cost of mining an ounce of gold and selling it; an important metric in today's volatile markets.  The valuation shows the company has the ability to demonstrate strong free cash flow and has a buffer for profitability as the spot price of gold ebbs and flows.  Should you wish to review or discuss our list of gold mining companies to watch, please contact us and we will be happy to forward this information to you.

We would like to bring your attention (see below) to an investment commentary published by the World Gold Council, which outlines the fundamentals which should drive gold investment demand in 2016.

World Gold council 2016 outlook:

#Uranium: #NexGen Returns Best Hole EVER at Arrow - Continuous GT = 787

Wow! 78.0 m at 10.00% U3O8 including 12m at 38.29% U3O8 including 2.5m at 60.58% U3O8 and a continuous GT of 787 

It's one for the record books!

 

A simply stunning result from the Arrow zone. Hole –62 which was the last of the summer 2015 program returns 78.0 m at 10.00% U3O8 including 12m at 38.29% U3O8 including 2.5m at 60.58% U3O8 and a continuous GT of 787 is the best hole to date at Arrow and the best in the Basin's history (angled holes in basement-hosted mineralization).

 

Hole –62 replaces another hole at Arrow - AR-15–44b (continuous GT of 655) as the best continuous GT returned from an angled hole drilled into basement-hosted mineralization from surface in the Athabasca Basin's history (on public record).  See table below.