Gold is back fashionable as investors seek out a secure haven amid growing global volatility.
The question is whether this gold rally will have legs, or whether or not this will fizzle out like numerous others in the last couple of years.
The yellow metal is incorporated in the midst of a tremendous upward move, jumping 18 percent since the start of 2016. The important thing gold futures contract rose by a whopping US$53.20 an ounce on Thursday alone, bringing it to US$1,247.80. Gold’s performance this year may be the polar opposite of most other commodities, that are down sharply.
Gold’s surge comes as global equities tumbled right into a bear market. On Thursday, stock indexes worldwide fell on fears over the health from the global economy and banking sector, with MSCI’s world stock index dropping to a lot more than 20 percent below its peak, while safe-haven 10-year Treasury yields hit their lowest since 2012.
Several factors are working in gold’s favour: In addition to wobbling financial markets, central bank gold buying is on the rise and the U.S. dollar is weakening as investors are increasingly doubtful that the Federal Reserve will raise rates of interest just as much or as soon as previously assumed. Those doubts gained steam after chairman Janet Yellen’s remarks to Congress this week, by which she took a cautious tone around the economy.
Over the past few years, the consensus view from Goldman Sachs and other Wall Street banks was that U.S. rate of interest hikes were imminent and were poised to crush the gold price. That drove many generalist investors from the market, and they’re just starting out to take a pursuit again.
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“The expectation that gold would be completely passed around the back of Fed rates of interest hikes appears like it will not happen,” said Sean Boyd, leader of gold mining giant Agnico Eagle Mines Ltd. “People are saying they need some protection and therefore are revisiting gold.”
Boyd said that because the rate hike thesis became ingrained, traders massively shorted gold and overwhelmed any bullish signals on the market. That encouraged investors to dump their holdings. Now that the interest rate thesis is evolving and investor sentiment has turned positive, he is hopeful that gold is poised for a sustained upturn.
Some from the gold fundamentals are clearly bullish. The planet Gold Council reported on Thursday that overall gold demand grew four percent within the fourth quarter of 2015, while central bank demand jumped 25 %. Mine production dropped the very first time since 2008.
Investors have been buying gold aggressively so far this year through exchange-traded funds, which added near to 100 tonnes of gold as of Feb. 4. ETFs shed a staggering 880 tonnes in 2013, which drove prices down.
The bullion rally has provided a huge boost to Canadian gold mining stocks, that have been up across the board on Thursday. Kinross Gold Corp.’s shares rose 14 percent, Barrick Gold Corp.’s shares rose four per cent, and B2Gold Corp.’s shares jumped 14.5 percent.
Despite the current gold euphoria, questions remain concerning the sustainability of the rally. Gold also moved higher in the first quarters of both 2014 and 2015, but tend to not keep that momentum for over a few weeks. Most professionals believe the same thing may happen now. Goldman Sachs, for just one, remains skeptical – now, it predicted prices would drop to US$1,000 an ounce by the end of 2016.
But Martin Murenbeeld, chief economist at Dundee Capital Markets and a close follower from the gold market, believes this rally is a bit different. He noted those prior two moves were tied to specific geopolitical events: Russia’s seizure of Crimea in 2014, and the Greek election in 2015.
“There’s no specific crisis today that you could say is pulling up gold, so that as soon as it dissipates that gold will come back off,” he said.
“What looks to be happening is the U.S. dollar is allowing this to continue. If the dollar will roll over, gold will do much better.”
Financial Post
pkoven@nationalpost.com
Twitter.com/peterkoven
