Five factors driving the outlook for gold Investors sitting on a 20% gain so far this year face choice of selling or doubling-down
by: Henry Sanderson
Has the gold price peaked for the year? The precious metal has just experienced its worse week since June 2013, falling 5 per cent as investors increasingly believe that the Federal Reserve will raise interest rates later this year, bolstering the US dollar.
That leaves gold investors, sitting on an over 20 percentgain so far this year facing a choice. Do you sell or double-down?
Analysts such as Goldman Sachs see the retreat in gold as a buying opportunity. Ongoing economic uncertainty, from signs of latent inflation to a possible Donald Trump presidency, have some investors ready to buy the dip.
But others are more cautious. Can gold really shine in the face of a further tightening in US interest rate policy?
Here are five things to watch for the precious metal during the remainder of 2016.
Helping foster gold’s rally during 2016 has been relief that expected rate tightening by the Fed at the start of the year has not materialised. Still, the gold market is on high alert for a December shift from the US central bank – and whether that could presage further increases. That could be bad for gold as it makes other yield-bearing assets more attractive.
Many, however, do not believe the Fed will be able to raise interest rates aggressively next year, given an uncertain economic outlook in Europe and China and a new president in the United States.
“I continue to think the global economy is too weak to withstand too many rate hikes from the Fed,” says Joe Foster of US money manager Van Eck, which also provides gold-backed ETFs. “This is shaping up to be a carbon copy of last December when we had all this anticipation of a rate increase and gold was weak. But the day they actually raised rates marked the bottom of the gold market.”
Other macro factors are also important for the gold market. If inflation increases faster than the pace of central bank tightening, that could boost gold, according to James Luke, a fund manager at Schroders.
In one historical example gold rallied in the early 1980s even as the Fed raised rates, with inflation escalating because of rising oil prices. That meant real rates were close or below zero, according to UBS.
Some $27bn has flowed into gold-backed exchange traded funds this year, according to BlackRock. That has duly supported the gold price.
One notable fact about last Tuesday’s sell-off was that it was not because of liquidation in ETFs, holdings of which have remained steady, and even rose slightly last week.
“The drivers of strong physical ETF and bar demand for gold during 2016 are likely to remain intact, including continued strong physical demand for gold as a strategic hedge, limiting any downside,” Goldman Sachs says.
China and India are the two largest consumers of gold – through jewellery and gold bars.
China is also a growing force in gold trading, through its influence on global prices through the Shanghai Gold Exchange and the Shanghai Futures Exchange. It also has four key gold-backed ETFs that are growing in popularity.
However demand from the two countries has remained lacklustre this year. Analysts are now looking to see whether the recent weakness in the price is likely to spur buying in Asia, especially in India where wedding season is approaching.
“Following the recent pullback gold is now near to the range that Indian and Chinese buyers have found to be an attractive entry point,” Numis Securities says.
For China, a growing property bubble and weakening renminbi could spur more gold purchases. Investors in the country have ploughed money into property this year, sending prices soaring, leading some cities to introduce buying restrictions.
The question is how the government controls the price rise without creating a bust ahead of the Communist Party’s Congress in late 2017. Any rupture could send money to gold.
Gold fell after Democratic party candidate Hillary Clinton’s strong performance in her first presidential debate with Donald Trump last month.
That was a sign the gold market is closely monitoring the chances for a Trump victory, which is expected to boost the price of gold because of the uneasiness many feel about having the entrepreneur running the world’s largest economy.
“Among potential scenarios a Trump victory combined with a further weakening in US data would see the gold market move aggressively higher,” Schroder’s Mr Luke says.
Could fears over Brexit boost gold? Gold rose to its highest level since March 2014 in the wake of the UK vote to leave the EU, but has since erased all of those gains.
Last week’s gold sell-off suggests monetary policy is overshadowing Brexit fears. The 6 per cent plunge in sterling on Friday saw gold only tick up marginally, at least in dollar terms.
“Brexit was priced in back in June and July and I think something new has to develop for gold to react,” says Mr Foster