Gold has returned in vogue as investors seek out a secure haven amid growing global volatility.
The question is whether this gold rally will have legs, or whether or not this will fizzle out like numerous others over the past couple of years.
The precious metal is incorporated in the midst of a tremendous upward move, jumping 18 percent because the start of 2016. The important thing gold futures contract rose by a whopping US$53.20 an ounce on Thursday alone, bringing it to US$1,247.80. Gold’s performance this year may be the polar complete opposite of most other commodities, which are down sharply.
Gold’s surge comes as global equities tumbled into a bear market. On Thursday, stock indexes worldwide fell on fears within the health from the global economy and banking sector, with MSCI’s world stock index dropping to more than 20 per cent below its peak, while safe-haven 10-year Treasury yields hit their lowest since 2012.
Several factors are working in gold’s favour: Along with wobbling markets, central bank gold buying is on the rise and also the U.S. dollar is weakening as investors are increasingly doubtful that the Fed will raise interest rates just as much or as soon as previously assumed. Those doubts gained steam after chairman Janet Yellen’s remarks to Congress now, by which she took a cautious tone on the economy.
Over the past few years, the consensus view from Goldman Sachs and other Wall Street banks was that U.S. rate of interest hikes were imminent and were poised to crush the gold price. That drove many generalist investors out of the market, and they are just starting out to take an interest again.
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“The expectation that gold would be completely beaten up on the back of Fed rates of interest hikes looks like it will not happen,” said Sean Boyd, leader of gold mining giant Agnico Eagle Mines Ltd. “People are saying they take some protection and are revisiting gold.”
Boyd asserted because the rate hike thesis became ingrained, traders massively shorted gold and overwhelmed any bullish signals in the market. That encouraged investors to dump their holdings. Since the eye rate thesis is changing and investor sentiment has turned positive, he is hopeful that gold is poised for any sustained upturn.
Some of the gold fundamentals are clearly bullish. The planet Gold Council reported on Thursday that overall gold demand grew four percent within the fourth quarter of 2015, while central bank demand jumped 25 per cent. Mine production dropped for the first time since 2008.
Investors have been buying gold aggressively so far this season through exchange-traded funds, which added near to 100 tonnes of gold by Feb. 4. ETFs shed an astounding 880 tonnes in 2013, which drove prices down.
The bullion rally provides a huge boost to Canadian gold mining stocks, that have been up across the board on Thursday. Kinross Gold Corp.’s shares rose 14 per cent, Barrick Gold Corp.’s shares rose four per cent, and B2Gold Corp.’s shares jumped 14.5 per cent.
Despite the current gold euphoria, questions remain about the sustainability of this rally. Gold also moved higher in the first quarters of both 2014 and 2015, but tend to not keep that momentum for more than a few weeks. Many experts believe the same thing may happen now. Goldman Sachs, for one, remains skeptical – now, it predicted prices would drop to US$1,000 an ounce by the end of 2016.
But Martin Murenbeeld, chief economist at Dundee Capital Markets and a close follower of the gold market, believes this rally is a bit different. He noted those prior two moves were associated with specific geopolitical events: Russia’s seizure of Crimea in 2014, and also the Greek election in 2015.
“There’s no specific crisis today that one could have to say is pulling up gold, and as soon because it dissipates that gold will come back off,” he said.
“What looks to become happening is the U.S. dollar is rolling over. When the dollar will roll over, gold is going to do far better.”