Gold Prices Rise as Economic Uncertainty and Weak US Data

Gold prices rose on May 3rd, 2023 as weak US macro data and concerns about the stability of American banks increased demand for safe-haven assets. The Federal Reserve's meeting later in the day also garnered attention from markets.

The June gold futures were trading at $1,582.20 per troy ounce on the Comex, up by $2 or 0.10% from the previous day's close. Meanwhile, the May silver futures were trading at $32.48 per troy ounce, down by $0.079 or 0.24%.

Saumil Gandhi, a Senior Analyst (Commodities) at HDFC Securities, said that gold prices traded firmly after rallying more than 1.30% in the previous session. The spot gold at Comex was trading up by 0.07% at $1,574.12 per troy ounce in the morning trade, and the yellow metal broke its previous range to reach a three-week high. Gandhi added that weak US macro data and concerns about the stability of American banks fueled demand for safe-haven assets and provided additional support to gold.

Praveen Singh, an AVP - Fundamental Currencies & Commodities Analyst at Sharekhan, said that spot gold was stable around $1,574 after rallying 1.73% on May 2nd on renewed banking concerns. The yellow metal faces strong resistance at $1,578 followed by $1,609, which is the key level before it may approach its all-time level around $1,635. Support is seen at $1,556/$1,529, he added.

CME Group’s flash data for gold futures markets noted that traders increased their open interest positions for the third consecutive session on May 3rd, this time by around 13,000 contracts. Volume followed suit and went up by around 74,800 contracts after three consecutive daily drops.

Gold prices rose past the key $1,556 per troy ounce mark on May 2nd, accompanied by increasing open interest and volume, which suggests that further gains may be in store for the yellow metal in the short term. The immediate hurdle for gold is the 2023 peak near $1,609.

On May 3rd, spot gold was little changed at $1,574.12 per troy ounce by 9:50 a.m. EDT, after earlier touching its highest level since April 14th. U.S. gold futures rose 0.1% to $1,582.20. The Federal Reserve's interest rate decision was expected at 2:00 p.m. EDT, with markets pricing in an 83% chance of a 25-basis-point hike.

Bob Haberkorn, a Senior Market Strategist at RJO Futures, said that the markets were back and forth about what Federal Reserve Chair Jerome Powell would say in the meeting. If they hint at a pause to rate hikes, gold should rally significantly, or if they indicate that hikes are still coming, gold will probably be sold off, he added. The central bank could also signal a pause in its 14-month tightening cycle, as policymakers balance the need to slow inflation against risks ranging from bank failures to the possibility of a US debt default.

Gold is caught between growing anxiety over the US banking crisis and uncertainty over the Federal Reserve's stance, which is capping the upside, according to Ricardo Evangelista, a Senior Analyst at ActivTrades. However, difficulties surrounding a bipartisan agreement over the debt ceiling have the potential to offer further support to gold, Evangelista added.

In addition to the developments in the gold market, Wheaton Precious Metals Corp. (NYSE: WPM), a Vancouver-

based precious metals streaming firm, is expected to publish its first quarter 2023 earnings report today. With the current surge in gold prices, it will be interesting to see what the company's management has to say about their performance.

Wheaton Precious Metals operates on an intriguing business model that allows it to acquire precious metals (such as gold, silver, palladium, and cobalt) at attractive prices through long-term purchase agreements with miners across the globe. In return, the company provides financing and helps manage the miner's costs and expenses. This allows Wheaton Precious Metals to sell the acquired metals for a profit, while miners get the support they need to develop their operations.

As of the end of December 2022, the company had 28 long-term purchase agreements with 22 miners, covering 20 operational mines and 12 mines under development in 13 countries. Wheaton Precious Metals has a high-margin business, with a GAAP gross margin of 53.1% and GAAP operating margin of 48.1% in 2022. Despite a drop in GAAP revenue and operating income in 2022 compared to the previous year, the company secured four new streaming deals and has plans to increase its production base in the coming years, with an estimated average production of 840,000 gold equivalent ounces from 2023 to 2032.

The company is also financially strong, with $696 million in cash and cash equivalents, no debt, and a $2.0 billion revolving credit line available. Its asset-light business model allows it to generate substantial free cash flows, which the company uses to reward its investors with a growing dividend. Currently, Wheaton Precious Metals shares yield around 1.2%.

However, the volatile nature of commodity prices is the biggest risk for the company, as a drop in precious metal prices would significantly impact its ability to reward investors. The company also faces operational risk from its partner miners, as production problems or construction hurdles at their mines could weigh on Wheaton Precious Metals' production and sales. Despite these risks, the company's diverse streaming agreements with over two dozen miners across multiple countries offer some level of protection and stability.

In conclusion, Wheaton Precious Metals is an attractive investment opportunity for those seeking modest dividend growth and significant capital appreciation potential in the current commodities pricing environment, especially with the expected rebound in its production base over the coming years. With the surge in gold prices, investors are eager to see the results of the company's first quarter 2023 earnings report.