Gold Price Strength Shouldn’t Be a Major Surprise to Anyone! (Part Two)
ROADHOUSE REGULAR: Gavin Wendt continues his look at the current fortunes of the most precious of metals.
Good News for Gold
All of this of course is good news for gold, for which I am an unashamed bull – as it remains the ultimate ‘insurance policy’ for investors and which has stabilized and strengthened in the wake of the Fed announcement.
As I read in a recent article, “As bond yields have been dropping gold, has been rising. But bonds can only go so low. Once the rates are negative the bond buyer is the one paying interest. At some point it would be better to ask for cash and pay for a safe deposit box.”
Gold however has no real top – and with each bout of bad news, gold can keep its rally going.
And the Fed is signalling they won’t step in for some time.
Gold tripled in value during the Great Recession, has since fallen back by more than 40 per cent, but just this year has rallied by 10 per cent off its lows.
The latest statistics further reinforce this demand strength.
Buying by central banks as well as Chinese investors seeking protection from a weakening currency have helped lift gold demand for Q4 2015 – and the trend looks set to continue.
The World Gold Council reported last week that China remained the world’s biggest consumer of gold, ahead of India – with economic headwinds influencing purchasing.
Chinese demand for gold coins surged by 25 per cent during the fourth quarter compared to the same period a year earlier, as consumers sought to protect their wealth after Beijing devalued the yuan currency.
But stock market turmoil and a slowing economy negatively impacted consumer, with Chinese demand for gold jewellery falling by 3 per cent compared to the previous year.
Indian jewellery demand reached its third-highest level on record in 2015 at 654.3 tonnes.
It’s clear that central banks have continued buying gold in order to diversify their reserves away from the US dollar, with purchases firming to 588.4 tonnes last year, second only to a record high of 625.5 tonnes during 2013.
In particular, central bank buying accelerated sharply during the second half of last year and jumped by 25 per cent during the fourth quarter.
Investment demand for gold is also improving and flows into exchange-traded funds (ETFs) turned positive this year.
Barrons reported last week that gold ETFs are going global, and one strategist contends that wider ownership will fortify the precious metal from selling by fickle American investors.
“You can quibble about magnitude, but a flood of dollars into gold-tracking exchange-traded funds seems to be stoking a rise in price of gold itself.”
John Teves, a strategist at UBS, notes that global ETF holdings have increased by 3.86 million ounces so far this year, and that fully two-thirds of this haul is from US-listed funds such as the SPDR Gold Shares (GLD).
“This ETF has already taken in (US)$2 billion in 2016, essentially recouping last year’s (US)$2.2 billion full-year outflow, according to ETF.com.”
At the same time the global supply of gold fell by 4 per cent last year to 4,258 tonnes, partly because of slower mine production.
Mining companies have scaled back since 2013 in a bid to slash costs, with mine production shrinking during the fourth quarter of 2015 – the first quarterly contraction since 2008.
Accordingly, I maintain our optimistic price forecast on gold of between $1,100 and $1,300 during 2016.
Gavin Wendt
www.minelife.com.au
This article first appeared in 