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LAWRIE WILLIAMS: Gold falls and recovers as equities and dollar present mixed signals

After a few days of optimism for the gold bulls, the early part of this week has seen the yellow metal plunge back to the £1,210s as the dollar continues to rise.  At the same time equities have also recovered from much of their heavy losses of last week perhaps staving off the October collapse many had been suggesting.  This morning however gold has  picked up a little, - some equities, notably the Nikkei in Japan, have started to move downwards again and the U.S. dollar index has, at the time of writing, come off a good number of basis points

So gold’s fall, and recovery this morning, has probably been more about the dollar than the past couple of days’ recovery in equities, although undoubtedly there is some correlation here – but the dollar looks like it remains the principal driver.

But, as we pointed out in an article a few days ago (See: Gold in almost any other currency…it’s an ill wind that blows nobody any good!  Dollar strength means that the gold price, despite its fall in U.S. dollars, remains strong in the currencies of most gold-producing nations – indeed is near, or even above, record highs in some.  This means, until inflation catches up, that the economics of gold mining in many of these nations has actually improved rather than declined despite any apparent fall in the U.S. dollar gold price.  This is perhaps why peak gold is possibly not quite yet with us, although global gold output is probably bouncing along close to its eventual high point.

And what of global gold demand?  Today the World Gold Council has just published its latest Gold Demand Trends report relating to Q3 2018.  This shows that gold demand is actually up year on year – just  - , although this is largely down to an increase in central bank gold offtake, countering a big general erosion in gold holdings at the gold ETFs.  But, of course what the report does not show, given its restricted timeframe, is what appears to be a recovery in ETF gold inflows since the end of the last quarter.  Whether this yet represents a turnaround in investor and institutional sentiment towards gold remains to be seen – but it could be a start.

Meanwhile the world’s major gold miners have been under attack by the media and many commentators given the generally poor Q3 figures announced.  Any stimulus from the proposed Barrick/Randgold merger seems to have dissipated, but in that this could well be a trigger for a substantial rethink on the management and policy front, this may prove to be a good time to climb back in to major gold miner investment given stock prices are probably at a low point following so much criticism.  Interestingly both Barrick and Randgold have announced dividend increases to sweeten the merger and this could well presage a general future improvement in the merged company’s dividend policy under Mark Bristow’s leadership assuming the remaining hurdles to the merger are overcome.  Perhaps we will learn more about this in what will probably be Bristow’s final Randgold quarterly results presentation in London next week.  Randgold has a far more generous dividend policy than Barrick and Bristow may offer Randgold shareholders something of a dividend promise to help keep them onside!  Certainly, although the merger terms suggest no premium for Randgold equity holders the fact that the world’s biggest gold miner had been trading so low could well be a hugely positive factor in terms of future performance for Randgold shareholders.

01 Nov 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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