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Gold Investors: Thanks, Janet!

23 March 2016 in Trading Ideas

Key Takeaways

  • Gold prices surged again after the Fed said interest-rate hikes will be less frequent this year than expected.
  • The metal – up more than 18 percent this year – is the year’s top-performing major asset class.
  • Increased demand from emerging markets has also helped to lift prices.
  • Motif mentioned: Precious Metals motif

Investors in gold-related investments have had much to be grateful for this year as the yellow metal has found life again after a multi-year selloff.

No doubt, however, many of them bowed in the direction of the Federal Reserve last week after the central bank decided to harness expectations of interest rate hikes for the foreseeable future.

The Fed cut its estimates for the number of times it was raising interest rates this year from four to two and offered a cautious outlook on the global economy.

The move immediately lifted prices for gold – nearly 3 percent on its April contract, and more than 5 percent for May delivery.

Since gold pays its holders nothing, it tends to compete with yield-bearing investments when interest rates rise. When rates are expected to remain subdued, however, prices can appreciate.

Gold also was helped by a weaker dollar, which fell to its lowest level since October after the Fed’s decision to keep rates unchanged. Gold, which is denominated in U.S. currency, becomes more affordable to foreign buyers when the dollar declines.

“The Fed move was just what the market needed to resume the uptrend,” Bill O’Neill, a broker at LOGIC Advisors, told the Wall Street Journal. “When they came in with a dovish statement, it was off to the races.”

Meanwhile, other factors have also contributed to gold’s rally, including good old supply and demand. Padraig Seif, chief executive of Honk Kong-based trading firm Finemetal Asia, told CNBC last week that consumers are lapping up gold at a time when supply is declining.1

Demand from emerging markets is strong as currencies such as the Indonesian rupiah, the Malaysian ringgit and the Vietnamese dong have fallen sharply in the last 12 to 18 months against the dollar, prompting consumers in these markets to buy physical gold for its safe-haven perception in times of economic tumult, Seif said.

Aside from state buying, Seif noted that the Chinese public is also pulling money out of stocks after a slump earlier this year to put their money into gold. The People’s Bank of China expanded its holdings by 0.6 percent to 57.50 million ounces in February from a month of earlier.

Meanwhile, availability of the metal has slumped. According to the World Gold Council, total supply declined 4 percent in 2015 to 4,258 tons – the lowest since 2009.

“Market sentiment has changed quite a bit…on the supply side, more and more bullion banks are pulling out of the bullion trade so … you’ve got a decrease in supply; on the demand side you’ve got an increase.

It’s quite natural then that the gold price will go up,” Seif said.

All of this has lifted gold to its status as the king of 2016 assets, beating out all major classes so far this year. Gold is up more than 18 percent this year, and is enjoying its best quarter since 1986, according to the Financial Times, which pointed out that investors have pumped $11.7 billion into gold exchange-traded funds so far this quarter, the largest quarterly inflow since 2009 and the second-largest quarterly inflow ever.

As a result, gold-related investments have outperformed. The Precious Metals motif, for example, has increased 17 percent in the past month. In that same period, the S&P 500 has risen 6.9 percent. Over the last 12 months, the motif has gained 12 percent; the S&P 500 is down 0.2 percent.

Given the big run-up, many investors might question whether the rally is spent – and it’s worth considering that gold did slip the day following its big “Fed rally” as some traders chose to take profits.

However, many any analysts see more room for gold to run, particularly given that many of the conditions supporting gold’s rise – slowing global growth and market turbulence – continue to hold up.

The FT, for instance, cited a recent note by HSBC metals analyst James Steel which revealed that in four previous Fed tightening cycles over the past 30 years, the dollar has fallen in the period immediately after the first rise.2

“The converse happens for gold,” Steel wrote. “Gold prices weaken going into a tightening cycle and then rally for the next 100 trading days,” adding that as rate hikes appear to be getting pushed back the gold rally should last even longer.

“We seem to be well into this period but given that rate hike expectations continue to be pushed into the future (HSBC economists expect a hike in June), we expect the gold rally to last even longer,” wrote Steel.

A parallel point of near-term optimism was offered by Guild Investment Management, which suggested that the psychological factors behind gold’s rally are likely to hold up.3

“The anxieties that have supported gold’s rally so far this year will ebb and flow with the course of global economic and financial news,” the firm wrote in a recent note. “But even so, we believe that technical factors and market participants’ suspicions about the competence of governments and central banks will continue to make the yellow metal shine in investors’ eyes.”

That’s the kind of bullishness that supports the notion that a further rise in prices has a completely credible future.

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.

  1. Huileng Tan, “Strong demand from emerging markets, limited supply keeping gold prices up,” cnbc.com, http://www.cnbc.com/2016/03/14/strong-demand-from-emerging-markets-limited-supply-keeping-gold-prices-up.html, (accessed March 20, 2016).
  2. “Gold carves out biggest rally in 30 years,” ft.com, March 18, 2016.
  3. Teresa Rivas, “Gold Rally Should Continue: Guild Investment,” barrons.com, March 18, 2016.