LAWRIE WILLIAMS: Gold price resilient and set for an interesting year
How things have changed in terms of market sentiment towards gold in just a couple of months! Heading into the end of 2015 virtually every bank analyst was predicting doom and gloom for gold as Fed rate rises would make holding gold less and less attractive. They were falling over each other to predict ever lower prices - $1050, $1000, $900 or even less. The only way was down.
There were some marginally conflicting analyses coming out – but only marginal – most seeing a continuing downturn in the first half or three quarters of 2016 but perhaps something of a pickup towards the year end. But this all made depressing reading for the gold investor despite some fundamental supply/demand factors suggesting that this outlook might have been too pessimistic.
The U.S. Fed duly implemented a fairly paltry 25 basis points interest rate rise in December while predicting perhaps four more such small rises during 2016, but this had been foreshadowed for so long it had little immediate impact on the gold price. But as the implications sunk in and the true realisation that neither the U.S. nor the global economies were advancing at anything like the rate the Fed and the optimists had been suggesting began to take hold, it was general equities which started to feel the strain. As they stuttered and fell back week in week out, gold started to make something of a recovery as the New Year came in. Everything was reversing.
Thus so far this year, gold has perhaps been the best performing asset class of all. From its close on December 31st it has risen by over 16% from $1,060 to $1,230 at the time of writing. Conversely the S&P 500 has been struggling and has fallen by over 3% since the beginning of the year (despite a big 2% pick-up yesterday) after a massive 150% rise from the beginning of 2009 to a peak in May last year, from where it has been somewhat more volatile. It suffered a steep fall around the time of the Chinese stock market crash and yuan devaluation in August – from which it recovered strongly, in part from ever-comforting words from the Fed and Fed-friendly analysts. But overall it ended the year well below its May peak – about 4% down – from where it has fallen further, but with a fairly volatile up-and-down path. It is currently sitting around 7% down on its 2015 peak level. Something of a shock to investors who had been used to what had appeared to be an ever-rising equities market.
Indeed, the gold price has so far been pretty resilient this year generally holding on to its big gains despite seemingly frequent attempts to pull it back. It has, though, so far failed to break through the significant $1,250 level except extremely briefly, but conversely has also so far seemed to hit strong resistance to falls in the $1,225-$1,230 levels. We are sure the downside pressures on the price will likely continue – just as the bears were victorious last year after an early year price surge – but so far the force has continued to stay with the yellow metal. Whether this can continue remains to be seen, but we do think the fundamentals, and the political risk elements ahead may well help it retain what strength it has generated so far.
One consequence of the almost six year continuing rise in equities had been the almost total rejection by the investment sector mainstream of gold as an investment asset. Gold ETF holdings were being liquidated as institutional and individual investors pulled out in favour of putting their money where the gains were to be made. In general equities. The markets ignored the fact that all these ETF liquidations, and more, were being eagerly soaked up by the Chinese, Indians and others yet the gold price was being marked down, month-in-month-out, on the COMEX futures markets where the gold price is largely set.
But in addition to the changes in direction in the general equities markets, there are other factors looming which could well be changing the global position of gold, and are all coming to a head this year. Perhaps closest at hand is the likely start-up of a Shanghai gold fix benchmark coming in probably next month and counting, so we hear, a dozen banks among its participants. This will start to wrest away gold price control from the Western bullion banks which many believe have a vested interest in keeping the gold price down at the behest of Western Central Banks which see gold as a dangerous basic economic indicator potentially outside their control. Whether the Chinese will see things differently remains to be seen but there have been continuing reports and statements that China sees gold as having a major role in the global economic hierarchy, and is building up its own gold holdings perhaps faster than its official figures might suggest. Given the large gold holdings by Chinese individuals, it is certainly possible that China might view a rising gold price as helping boost any feeling of economic well-being among its populace – important when its economy seems to be a little precarious.
A second major event this year will be the Chinese yuan’s inclusion in the SDR basket of currencies, effectively giving it reserve currency status and reducing the dominance of the US dollar in world trade. This is due to happen in October. While the initial effects will probably be minor, over time the new order could see the yuan pari-passu with the US dollar in global trade and reserve holdings and the eventual demise of the petrodollar with all the benefits that brings to the U.S. economy. China, and some of its allies, see gold as a significant element in its economic way forward.
And then there is the U.S. Presidential election in November which, after yesterday’s Super Tuesday results looks ever more set to be a runoff between Donald Trump and Hillary Clinton – two who will hugely polarise the U.S. electorate in perhaps a manner never seen before. There will be enormous political conflict here and this will undoubtedly result in extreme nervousness on behalf of the people supporting the losing candidate which may well send them running for the safe haven that is gold, whatever the metal’s performance between now and then.
There is also the distinct possibility that the UK will vote in a referendum to pull out of the European Union – Brexit – in June. This is another event which, if it happens, will create huge uncertainties not only in the UK, but throughout the rest of the EU too, giving huge momentum to anti-EU movements in other member countries . This is being perhaps exacerbated by the refugee crisis in Europe which is hugely polarising opinion in particular on the open borders policy – the Schengen accord – between most EU member states. Many would see this as the beginning of a break-up of the EU and the demise of the Euro. Yet another geopolitical uncertainty element which has to be positive for gold.
And all this without even mentioning other major flashpoints, like the Ukraine, Syria, Iraq, Libya, North Korea, the South China Sea and undoubtedly some others which will flare up through the year. While gold has seemed to be loath to move much on any of these individually, in combination with the other factors, together with the huge change in sentiment towards gold investment, this suggests the gold price could make a strong comeback this year.
We are already seeing this in gold ETF purchases which have been staggering so far. The biggest of all – GLD – has added around 144 tonnes of gold in the first two months of the year, putting it in ninth place among known gold holders (i.e. after the USA, IMF and the other top 6 central bank gold reserve holdings) with a total holding as of yesterday of 786.2 tonnes. This is still hugely below its peak of over 1,350 tonnes towards the end of 2012, though, which would have put it in around 6th place among the world’s gold holders.
Indian demand is set to pick up now after the budget uncertainty is over, despite another tax imposition on gold – the Modi Government has certainly not so far been a gold-friendly one! We await with some interest the now monthly Shanghai Gold Exchange withdrawals figure for February to see how Chinese demand is progressing this year, which is probably due out at the end of next week. By all accounts Chinese demand has slipped year on year, but has been more than replaced by gold ETF purchases. But overall gold continues to flow from West to East, while western physical gold inventories continue to be run down. This cannot continue ad infinitum without having a positive effect on the gold price as physical gold becomes harder to obtain.
All in all the above makes for a very ‘interesting’ year ahead in global geopolitics, economic growth and for precious metals. It has the potential for leading to continuing strength in the gold price. Could this be the year it finally breaks its four year downtrend?
02 Mar 2016