There are lots of explanations why gold continues to be one of the best-performing assets in 2016, including volatility in global equity markets and investor uncertainty.
Whether otherwise bullion continues this winning streak is anybody’s guess, but there is an incident to make for your rally to fizzle, as well as for prices to climb further.
Physically-backed gold ETFs really are a useful sell to watch, and the initial two months of year demonstrated very healthy demand. Actually, the nearly 260 tonnes of net inflows in January and February rivals the 284.4 tonnes seen in all 2012.
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That’s helped push total holdings support near levels not seen since late in 2014, based on RBC Capital Markets.
More notably, the best time monthly inflows were this high was during the first quarter of 2009, when investors were answering the government Reserve’s first quantitative easing program because the financial crisis.
Helima Croft, head of commodity strategy at RBC, noted that ETF flows have essentially moved in lock-stock with gold prices. The precious metal has jumped towards the bottom to the peak amount of their almost 200-dollar range, now hovering across the US$1,250 per ounce level.
“One note of caution, this inflow has materialized in just the very first 2 months of year which flow can reverse just like quickly,” Croft told clients.
Since heightened risk perception, negative interest levels and volatility in equity and foreign exchange have supported gold’s ascent, a reversal in almost any of these drivers could put pressure on bullion.
However, the gold bulls may have another factor on their own side: global trade.
With 2015 marking the largest collapse within the cost of goods traded globally since the height of the financial crisis in 2009, HSBC chief gold and silver analyst James Steel noted this could be telling us a great deal about gold prices.
When globalization is accelerating, this usually coincides with falling gold prices, given that they signal less geopolitical tension, a discount of trade barriers, higher cross-border capital flows, and healthy growth.
“Conversely, reduced trade is usually a manifestation of a rollback in globalization, indicating heightened geopolitical tensions, reduced investment, weak global equity markets, and uncertainty,” Steel said in the research note. “This enhances the ‘safe-haven’ dependence on gold that is therefore gold-bullish.”
For most investors, the key question for you personally is when the benefits of higher gold prices are fully discounted in gold equities.
Gold expires about 20 per cent in 2016, because the S&P/TSX Global Gold Index has registered a rise of roughly Forty percent.
National Bank Financial mining analyst Steve Parsons’ overview of historical valuations suggests more upside for gold prices, but he cautious this will likely include bouts of volatility.
While gold prices in 2016 are relocating the identical manner fot it of 2010, there is a key difference now.
Parsons noted the “cat no longer has sufficient the bag” for the reason that investors have a much better appreciation from the challenges facing mining companies in term of reserves, advancing projects, then delivering on free income expectations.
“While you will find exceptions,” the analyst said, pointing for that stronger companies within the gold sector, “for other group it may be unreasonable can be expected valuations revisit 2010 levels in the step-change move,” he was quoted saying. “That being said, we do see scope for progressive gains as gold prices take advantage of negative interest rate momentum then when gold equities continue to recover lost ground vis–vis the broader equity markets.”
The caveat, Parsons noted, is the fact that upside will most likely include continued volatility.
Financial Post
jratner@nationalpost.com
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