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Gold investors push demand to new heights

17 May 2016 in Trading Ideas

Key Takeaways

  • Gold just posted its highest quarter of demand in 30 years.
  • Negative interest rate policies by various countries has made the metal relatively cheaper.
  • China’s gold demand fell, but its economic uncertainty have actually helped prices.
  • Motifs mentioned: Precious Metals

When demand for a commodity has just exhibited its strongest quarter in almost 30 years, even investors who stood on the sidelines may want to consider reserving some room for it in their portfolios.

Last week, the World Gold Council said that demand for the yellow metal jumped to record levels in this year’s first quarter, due to low interest rates that sparked buying and the hunger from gold exchange-traded funds pushed global demand up 21 percent from a year earlier.1 The metal’s heightened attractiveness has come in the wake of the U.S. Federal Reserve’s slowing pace of rate increases. As a general rule, investors perceive that muted interest rates support higher gold prices by weakening the U.S. dollar and helping gold compete with yield-bearing assets like U.S. Treasury bonds.

Also contributing to gold’s rally is rising concern over negative rates in Europe and Japan. As Bernard Aw, a strategist at IG Asia Pte, told Bloomberg last week, investment demand overall has been undergoing a structural shift. “Firstly, the negative interest rate environment and quantitative-easing policies are reducing the pool of suitable investment options, and making gold less costly to hold,” Aw said. “Second, lingering fears of competitive currency devaluations and potentially fresh bouts of market volatility encourage safe-haven demand.”2

Gold-related investments have similarly surged. The Precious Metals motif, for example, has gained 16.2 percent in the past month. During that same time, the S&P 500 has fallen 0.7 percent.

Over the last 12 months, the motif has gained 22.4 percent; the S&P 500 is down 2.6 percent.

Eastern impact

Of course, China’s shadow looms large over any discussion of gold, as the country accounts for more than a quarter of the metal’s demand, and to that end, fears surrounding China’s economy following the devaluation of the yuan have also helped support the recent in run in gold prices, according to the Wall Street Journal.

It’s worth noting, then, that the World Gold Council reported that demand in China fell 12 percent in the first quarter due to the country’s continued economic slowdown as well as higher prices.

In addition, gold’s application in technology fell 3 percent, as was demand from central banks.

Still, while global demand rose 21 percent, global supply rose only 5 percent, which could suggest a near-term floor for prices.

The World Gold Council said it anticipated that future investment and central bank gold demand would be supported by the ongoing market uncertainty, particularly around monetary policies.

That take was echoed last week by JPMorgan Private Bank’s Solita Marcelli, who plainly told CNBC that the firm is recommending its clients position for a “new and very long bull market for gold.” Marcelli said that with the continuation of so many negative interest rate policies around the world, gold will continue to be bought as an alternative currency. Further, she expects that in the interest of seeking a hedge to volatility, gold will remain attractive in an investing backdrop where bonds and US rates may cease to be the main “risk-off” asset.3

“Gold is a great portfolio hedge in an environment where the world government bonds are yielding at historically low levels,” Marcelli said, adding that she believes the move will come slowly and that the key $1,400-an-ounce level for gold is the “first line in the sand.” While Marcelli admits the move will come slowly, she remains convinced that the commodity will continue to grind higher — with that key $1,400 level being the first line in the sand. (The metal briefly crossed $1,300 an ounce earlier this month before recently retreating).

A more circumspect view was offered by Commerzbank analysts, who said while they didn’t expect first-quarter investment demand to repeat itself, jewelry demand “should pick up again,” supporting gold prices in the medium term.4

Depending on an individual investor’s outlook on future global economic uncertainty, prospects for a further rally in gold might be extremely easy to visualize.

  1. Ese Erheriene, “Gold Demand Jumps to Record Level Thanks to Investment Buying,” wsj.com, May 12, 2016.
  2. Ranjeetha Pakiam, “Central Bankers’ Wisdom Faulted as Gold Holdings Surge 25%,” Bloomberg.com, May 15, 2016, http://www.bloomberg.com/news/articles/2016-05-16/the-25-jump-in-gold-holdings-that-shows-angst-on-central-banks, (accessed May 16, 2016).
  3. Brian Price, “Gold has entered a new bull market: JPMorgan,” cnbc.com, May 11, 2016, http://www.cnbc.com/2016/05/10/gold-has-entered-a-new-bull-market-jpmorgan.html, (accessed May 16, 2016).
  4. Ese Erheriene, “Gold Demand Jumps to Record Level Thanks to Investment Buying,” wsj.com, May 12, 2016.

Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.