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LAWRIE WILLIAMS:All change in gold sentiment, but can it persist.

Back in December gold had few, if any, friends among the mainstream analysts.  The US Federal Reserve was going to start raising rates and all the experts knew that so doing would lead to a rise in the value of the US dollar and a consequent fall in the gold price.  Apart from the usual suspects, gold had virtually no supporters.  But three weeks after the Fed did indeed start to raise interest rates, the whole sector began to turn completely around.  General equities fell and gold started to rise, while the dollar rose, then stuttered backwards.  So much for expert opinions.

Gold’s performance has been little short of spectacular so far this year, with an increase to date of around 18% in just over 2 months.  Equities have made something of a recovery in the past few days, but as a guide the S&P 500 is down a couple of percent year to date.  In Europe the UK’s FTSE 100 is flat, Germany’s DAX is down 4% and in Asia Japan’s Nikkei 225 has fallen nearly 8% while China’s SSE Composite is down almost 13%. 

Gold thrives on uncertainty and in the US and Europe there are some huge political uncertainties out there of which two, which will definitely happen this year, could have a big effect on any uncertainty index.  First, there is now a strong possibility of Donald Trump winning first the Republican presidential nomination and then, in November, the definite chance that he could take the White House as well.  In Europe the possibility of a UK exit from the European Union looms large – the Brexit option!

In our view there is a at least a reasonable possibility that both these could happen – not because there’s necessarily any real positive logic in either such event, perhaps the reverse, but because of the sectors of the electorate to which Trump and Brexit appeal most – blue collar workers and the disaffected middle class who fear immigration and care little nowadays for mainstream political rhetoric, indeed disbelieve it from bitter personal experience.  Yes, the financially astute will mostly vote against Trump and for the UK to stay in the EU as the safer options, but they are probably in the minority.  In the U.S. Trump almost certainly may appeal as much to disaffected Democrats as to Republicans, while in the UK Brexit appeals to similar population sectors in terms of disaffected Labour supporters as well as to many right wing Conservatives and nationalists.  In other words both can cross the divide and win votes from hitherto totally committed Democrats and Labour party supporters.  Those who are ‘mad as hell and don’t want to take this any more’, in the famous words from the 1976 Oscar winning (Best Actor, Best Actress, Best Supporting Actress and best screenplay) film ‘ Network’, would seem to be natural Trump and Brexit supporters.

Trump’s policies, if he is elected President, are a huge unknown and his prospects of carrying Congress with him, if he is elected, may be somewhat limited.  But in terms of global geopolitical  uncertainty it would rank high.  Making America Great again has all kinds of unwelcome undertones, and perhaps unintended consequences, throughout the rest of the world.

In Europe Brexit would not just affect the UK, but might well encourage anti-EU factions in a number of other EU countries to take an ever-higher profile – not least in the two key states of Germany and France where there is disillusionment with the broadening of the EU into what are seen as less economically stable countries, while the open-borders agreement is already breaking down with the enormous influx of refugees.  It would also destabilise the European economy. As the supposed Chinese proverb might say we are very definitely entering ‘interesting times’.  Good for gold.

And the above are just the two most prevalent ‘known unknowns’ out there.  Events which we know about and could happen.  There are many other significant areas of unrest on the geopolitical front – Ukraine, Syria, Iraq, Yemen, North Africa, the South China Sea, North Korea – any of these could escalate into something more serious. Then there are potential changes in the world economic order and in the gold market itself.  What will be the effects of the Chinese Yuan becoming part of the SDR basket, effectively giving it Reserve Currency Status - due to happen in October?   How will a Shanghai yuan gold fix affect the gold price if it is free of possible Westerns bullion bank interference - due to happen in April?  Andi will the current general equities uncertainties develop into a global stock market crash as a number have been predicting?

And how about Black Swans – the unknown unknowns?  There are almost certain to be some of these rearing their heads during the year.  Gold tends to thrive on uncertainty and it has gradually been coming back into the fold as an investment asset given sentiment towards it has been changing amidst the performance of stock markets over the past year or so which has interrupted the ever-upwards path of equities as pointed out above.  Safe Haven investing could well be coming back into favour.  2016 is turning out to be good for gold – so far – and a number of previously pessimistic bank analysts are now switching to be pro-gold, although not Goldman Sachs or Natixis which both remain confirmedly negative.  And obviously a gold investor should be aware that early year gold price rallies in the past two years have ended badly.  But neither has been as strong as the latest one.

Perhaps the biggest obvious turnaround, at least in the U.S. where the gold price tends to be set via activity on the COMEX paper markets, has been the big inflows into the two biggest U.S. gold ETFs/ETCs, GLD and IAU.  The former has taken in over 140 tonnes so far this year and seems to be attracting daily inflows.  The much smaller IAU, run by Blackrock is, hopefully temporarily, prevented from taking on new investment as it has run out of shares!  In a statement Blackrock says: “This surge in demand has led to the temporary exhaustion of IAU shares currently registered under the ’33 Act. We are registering new shares to accommodate future creations in the primary market by filing a Form 8-K to announce the resumption of the offering of new shares.” An obviously unintended hiatus brought on by unprecedently trong demand.  The procedure to enable the ETC to take in additional investment will likely take a few days.

So, at the moment, the momentum is certainly with gold.  At the time of writing the price has been edging above $1,270 again (although finding it tough to make progress above this level) – a rise of around $200 year to date.  Some observers are calling it a return to a bull market, but it is early days yet.  There does however seem to have been a trend suggesting that even slightly positive U.S. economic news, which at one time would have depressed the gold price, is having little or no effect on the current upwards path.  There is profit taking coming in – and the usual moves to try and take the price back down, but so far these also have been having little effect serving only to bring the price back temporarily, before it resurrects itself.  This does suggest that it could well be poised to go higher with perhaps an initial target of $1,300 in its sights. 

Central banks are indeed also net buyers, but it is still only Russia and China which are upping their reserves in significant quantities, with Kazakhstan trailing behind with a couple of tonnes a month.  There is no concerted move by other central banks to raise their reserves as the headlines might appear to suggest.  Indeed Canada has reduced its gold reserves to virtually zero and there are indications that Venezuela may be selling some of its gold to mitigate a major national debt crisis.

But with gold, so much depends on sentiment and momentum, and while these remain positive, as at the moment, any change could see it coming back down again.  There are almost certainly some waiting in the wings prepared to jump in and strike on any perceived downwards move.  This could thus be a dangerous time for the gold investor.  But so saying, for many of the reasons noted above, there are an awful lot of economic and geopolitical uncertainties present or building up which could well remain positive for precious metals, but any continuing upwards rise may well not prove to be a smooth one.

07 Mar 2016 | Categories: Gold

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