Gold soars, but will it last?
Price of precious metal rising while global equities fall into bear market
Gold is back in vogue as investors seek out a safe haven amid growing global volatility.
The question is whether this gold rally will have legs, or whether it will fizzle out like numerous others over the past few years.
The yellow metal is in the midst of a tremendous upward move, jumping 18 per cent since the start of 2016. The key 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 contrasts with that of most other commodities, which are down sharply.
Gold’s surge comes as global equities fell into a bear market. On Thursday, stock indexes worldwide fell on fears over the health of the global economy and banking sector, with MSCI’s world stock index dropping to more than 20 per cent 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 interest rates as much or as quickly as previously assumed. Those doubts gained steam after chairman Janet Yellen’s remarks to Congress this week, in which she took a cautious tone on the economy.
Over the past few years, the consensus view from Goldman Sachs and other Wall Street banks was that U.S. interest rate hikes were imminent and were poised to crush the gold price. That drove many generalist investors out of the market, and they are only starting to take an interest again.
“The expectation that gold was going to be completely beaten up on the back of Fed interest rates hikes looks like it’s not going to happen,” said Sean Boyd, chief executive of gold mining giant Agnico Eagle Mines Ltd. “People are saying that they need some protection and are revisiting gold.”
Boyd said that as the rate-hike thesis became ingrained, traders massively shorted gold and overwhelmed any bullish signals in the market. That encouraged investors to dump their holdings. Now that the interest-rate thesis is changing and investor sentiment has turned positive, he is hopeful that gold is poised for a sustained upturn.
Some of the gold fundamentals are clearly bullish. The World Gold Council reported on Thursday that overall gold demand grew four per cent in the fourth quarter of 2015, while central bank demand jumped 25 per cent. Mine produc- tion dropped for the first time since 2008.
Investors have been buying gold aggressively so far this year through exchange-traded funds, which added close 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 min- ing stocks, which were up across the board on Thursday. Kinross Gold Corp.’s shares rose 14 per cent, Barrick Gold Corp.’s shares rose four per cent, and B2Gold Corp.’s shares jumped 14.5 per cent.
Despite the recent gold euphoria, questions remain about the sustainability of this rally. Gold also moved higher in the first quarters of both 2014 and 2015, but could not keep that momentum for more than a few weeks. Many experts believe the same thing will happen this time. Goldman Sachs, for one, remains skeptical — this week, 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 of 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 one could say is pulling up gold, and as soon as it dissipates that gold will come back off,” he said.
“What looks to be happening is the U.S. dollar is rolling over. If the dollar rolls over, gold will do much better.”
The expectation that gold was going to be completely beaten up ... looks like it’s not going to happen.