Golden start to 2016 — but will it last?
Bullion rally could fizzle, or go even higher
There are plenty of reasons why gold has been one of the best- performing assets in 2016, including volatility in global equity markets and investor uncertainty.
Whether or not bullion will continue this winning streak is anybody’s guess, but there is a case to be made for both the rally to fizzle, and for prices to climb further.
Physically backed gold ETFs are a useful market to watch, and the first two months of the year demonstrated very healthy demand.
In fact, the nearly 260 tonnes of net in flow sin January and February rivals the 284.4 tonnes seen in all of 2012.
That’s helped push total holdings back up near levels not seen since late in 2014, according to RBC Capital Markets.
More notably, the last time monthly inflows were this high was back in the first quarter of 2009 when investors were responding to the Federal Reserve’s first quantitative ea sing program since the financial crisis.
Helima Croft, head of commodity strategy at RBC, noted that ETF flows have essentially moved in lockstock with gold prices. The precious metal has jumped from the bottom to the top of its almost 200- doll ar range, now hovering around the US$ 1,250 per ounce level.
“One note of caution, this inflow has materialized in just the first two months of the year and that flow can reverse just as quickly,” Croft told clients.
Since heightened risk perception, negative interest rates and volatility in equity and currency markets have supported gold’s as cent, a reversal in any of these drivers could put pressure on bullion.
However, the gold bulls may have another factor on their side: global trade.
With 2015 marking the biggest collapse in the value of goods traded globally since the height of the financial crisis in 2009, HSBC chief precious metals analyst James Steel noted this may be telling us a lot about gold prices.
When globalization is accelerating, this usually coincides with falling gold prices, since they signal less geopolitical tension, a reduction of trade barriers, higher cross- border capital flows, and healthy growth.
“Converse ly, reduced trade is typically a sign of a rollback in globalization, which indicates heightened geopolitical tensions, reduced investment, weak global equity markets, and uncertainty,” Steel said in are search note .“This increases the‘ safe-haven’ need for gold and is therefore gold- bullish.”
For most investors, the key question is whether the benefits of higher gold prices are fully discounted in gold equities.
Gold is up about 20 per cent in 2016, while the S& P/ TSX Global Gold Index has registered a gain of roughly 40 per cent.
National Bank Financial mining analyst Steve Parsons’ review of historical valuations points to more upside for gold prices, but he cautious that this will likely come with bouts of volatility.
While gold prices in 2016 are moving in a similar manner to that of 2010, there is a key difference this time around.
Parsons noted that the “cat is out of the bag” in that investors now have a better appreciation of the challenges mining companies in term of reserves, advancing projects, and then delivering on free cash flow expectations.
“While there are exceptions ,” the analyst said, pointing to the stronger companies in the gold sector ,“for there st of the group it may be unreasonable to expect valuations to return to 2010 levels in a step- change move,” he said.
“That being said, we do see scope for progressive gains as gold prices benefit from negative interest rate momentum and as gold equities continue to recover lost ground vis-à-v is the broader equity markets.”
The cave at, Parsons noted, is that upside is likely to come with continued volatility.
WE DO SEE SCOPE FOR PROGRESSIVE GAINS.