Gold has been the pick of the bunch in recent weeks
London (Jan 25) Every January an asset comes into favour, making gains as sentiment flips with the calendar. As was the case a year ago, gold has been the pick of the bunch in recent weeks, buoyed by central banks scrambling to stimulate growth through monetary easing.
The precious metal has advanced 9 per cent this month and is trading above $1,300 (Dh4,771) a troy ounce, its highest level in five months. Denominated in euros, gold’s performance has been even more impressive, at its highest since 2013, up 17 per cent.
Gold, traditionally seen as maintaining its value against floating currencies, has prospered with markets on edge as central banks have attempted to deal with deflation in the wake of falling oil prices. For investors buying gold, an important consideration is whether the market can remain in favour and not lose momentum after another promising start to the year.
Much depends on the success of central banks in boosting economic activity and averting disinflation. Here the message from the gold market suggests the stimulative powers of central banks are under scrutiny.
“What we’re seeing is the first symptoms of markets losing faith in central banks,” says Joe Foster, portfolio manager at Van Eck Associates. “And if the global macroeconomic events cause the Fed to postpone their rate increase, that confidence will erode further.”
One sign of increasing pessimism among investors is that gold and the dollar are both rising. Usually a stronger dollar puts pressure on gold, and that relationship emerged for a while after last summer but has since broken.
“People are turning to gold and the dollar simultaneously,” says Foster. “That means there is a high risk of deflation elsewhere, or problems in Europe eventually coming back to hit the US.”
Big lesson
Given the European Central Bank’s launch of a massive quantitative easing programme, the risk of a failure to arrest deflation is seen as benefiting gold, say analysts. For gold investors the big lesson from other QE programmes is that inflation in the UK, the US and Japan has subsequently fallen in spite of such monetary largesse.
The ECB’s programme exceeded market expectations and has put great pressure on the euro, sending the currency tumbling to a level not seen for 11 years. That has also been accompanied by surprise interest rate cuts from the central banks of Canada and Denmark.
In turn global monetary easing has pushed real bond yields into negative territory, adding to gold’s appeal as a store of value. Over the week leading up to the ECB’s announcement, flows into dedicated gold funds surged to a three-year high, according to fund tracker EPFR. Silver has also been a beneficiary, rising 16 per cent this year.
“At long last the market is concerned that portfolios are disproportionately exposed to fiat currencies [which are not backed by a physical commodity] and are worried about policies that push nominal growth at the expense of real growth,” says Joe Wickwire, manager of the Fidelity Select Gold Portfolio, which has $976 million in assets.
The Swiss National Bank’s sudden abandonment of the franc’s peg against the euro, which sent the currency soaring, has added to fears that central banks are struggling to control policy.
On Wednesday the Bank of Canada suddenly cut its benchmark interest rate, sending the Canadian dollar down 2.3 per cent. A day later Denmark followed suit, to defend the value of the krone. “That’s all creating financial stress in the system,” says Foster.
Analysts note that if the ECB’s QE programme is successful and boosts growth, gold could fall back and other commodities, such as the base metals, may benefit, according to Macquarie.
“The positive economic impact of QE is unlikely to be seen for many months, and while confidence can increase immediately, it is a fragile thing,” the bank noted in research. “The Eurozone faces many structural economic challenges and medium term its economic prospects are poor.”
Positive sentiment
Higher prices could also deter physical demand for gold in India and China, the world’s largest consumers. China’s consumers bought large amounts of gold as the price dipped in 2013.
Goldman Sachs expects the gold price to start declining later this year as the Fed starts raising interest rates. “This will translate into declining gold prices [in US dollar terms],” the bank says.
While sentiment is positive this year, a price above $1,345 would add reassurance that the rally can last on a technical level, according to Ross Norman of Sharps Pixley, a London-based bullion broker. And a price above $1,450 would mean “the bull run is back on course”, he says.
That could depend on how quickly signs of inflation show up. “There are certainly signs of fragility to the global economy, and that’s reflected in the investor flows we’ve seen,” says Norman.
But will we maintain momentum? That’s the key thing. When no one’s watching, does gold creep higher?”
Source: GulfNews
