Should gold be doing better?
Uncertainty in financial markets has continued to fuel safe-haven demand for gold, giving rise to an unlikely question: should gold be doing better?
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The yellow metal has cemented its status as the best-performing commodity of the year, rising more than seven per cent year-to-date in dollar terms.
Having hit fresh three-month highs buoyed, by a sell-off in equities and most recently dollar weakness, it is currently trading above the US$1 140 an ounce level.
Sell-off
The current price marks a significant improvement from the US$1 050 an ounce mark, the six-year low at which it traded less than two months ago. But it is still lower than its October 2015 peak, just above US$1 187 an ounce.
As Julian Jessop, Head of Commodities Research at Capital Economics, points out, that peak was prompted by a sell-off in global equities much like the one in recent weeks.
And expectations that the US Federal Reserve (Fed) may postpone further interest rate hikes ought to have lifted the prospects for non-interest paying bullion.
Citing comments from William Dudley, a member of the Fed’s monetary policy setting committee, reports that “considerably tighter” financial conditions may factor into the Fed’s next monetary policy decision have emerged.
Charting these factors, Jessop writes: “On the basis of these first two charts at least, the price of gold might already be expected to be back at US$1 250”. Capital Economics year-end gold price forecast is US$1 250 an ounce.
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Dollar weakness, prompted by reports of disappointing US economic data in January, may add to the momentum in the gold price. “The upside for gold had been capped by the resilience of the dollar against other currencies,” says Jessop.
Seamus Donoghue, CEO of Allocated Bullion Solutions, adds: “We believe market participants appear to be growing bullish on gold, motivated by [its] steady performance following the December Federal Open Market Committee [rate hike], severe tensions over the equity market sell-off and demand for safe havens against forex volatility and geopolitical concerns.”
Supply and demand fundamentals also appear slightly more promising. Thomson Reuters GFMS has forecast that global gold production will decline by 3% for the first time in seven years.
What is the current gold price telling us?
According to Jessop, it suggests “a number of near-term threats to the gold rally”. Better US economic data and quantitative easing by other central banks may limit the upside for gold, he said
Nicholas Colas, Chief Market Strategist at Convergex says that gold, which is down 17 per cent over the last five years, is not out of the woods.
“The current move merits attention, but the burden of proof sits squarely on the bullish case and gold needs to show a +10 per cent move in 2016 before anyone will call an end to the bear market that started in 2011,” he says.
At this stage, moving into gold may also be premature. “While 2016 has certainly gotten off to a strong start, unfortunately, it is a similar script that we have seen play out several times in recent years. And, unfortunately, in each past instance, the story ultimately ended badly,” writes Eric Parnell, Founder and Director of Gerring Capital Partners, in reference to gold price movements dating back to 2012.
“Over the last 20 years, gold seems to have become the market’s protest vote against global central bank policies. The real worry is that gold begins to move quickly higher, making it something like the Donald Trump of investable assets,” says Colas. Perhaps, a whole lot of hot air?