Heightened Risk, Easy Money And Gold

August 27, 2019

In recent months, the World Gold Council released a few interesting reports. What can we learn from the publications? We’ll then supplement it with the view of the Fed policies. Will gold like the message?

Gold Demand Trends Q2 2019

On August 1, the WGC published a new edition of its quarterly report on gold demand. According to the organization, the supply of gold grew 6 percent (recycling jumped 9 percent, while mine production increased 2 percent), while the demand for gold rose 8 percent year-over year to 1,123 tons in the second quarter of 2019.

The main driver of the increase were record central banks' purchases. Central banks bought 224.4 tons of gold, 47 percent more than one year ago, of which only the National Bank of Poland purchased 100 tons. Low interest rates, slowdown in global growth, geopolitical tensions, and uncertainty caused by trade wars turned reserve managers’ appetite toward gold.

The second major driver of the strong demand for gold were healthy ETF inflows. Holdings in global gold-backed ETFs grew by 67.2 tons in Q2, reaching 2,548 tons. The inflows were supported by the geopolitical uncertainty, dovish shift in the US monetary policy, and strong momentum.

Interestingly, around 75 percent of all global inflows during the second quarter were directed towards UK-listed funds. It indicates that investors sought the safe-haven of gold amid the uncertainty surrounding Brexit.

When it comes to other categories, jewelry demand rose 2 percent, thanks to strong recovery in the jewelry market of India (demand up 12 percent). Technology demand declined 3 percent, hit by slower global GDP growth and US-Sino trade war. Bar and coin investment sank 12 percent.

As always, we remind investors to take the WGC report with a pinch of salt. Their data is not adequate at best, or flawed at worst. The demand for gold increased 8 percent, while the supply rose 6 percent. The difference is not big and cannot explain the gold price shooting to multi-year highs, well above $1,400. Funnily enough, the WGC admits that “Among the factors driving this rally were expectations of lower interest rates”. Indeed, expectations play much bigger role that changes in the reported gold supply and demand categories.

Mid-Year 2019 Gold Outlook

In July, the WGC published its mid-year gold outlook. The organization notes that in the first half of the year, major central banks have signaled a more accommodative stance, bringing global bond yields to multi-year lows, making gold one of the best performing assets by the end of June. It is very important that – because of falling interest rates, higher risk and momentum - precious metal investors have generally been more bullish this year.

But what about the future? The WGC believes that financial market uncertainty, accommodative monetary policy, and low real interest rates will likely support gold investment demand. We agree. At the end of the previous year, we correctly forecasted that the Fed’s tightening cycle will reach its peak in 2018, making 2019 a better year for gold prices. Actually, our mid-year fundamental outlook is even better, as the Fed has actually reversed its stance and cut the Federal Funds Rate, effectively ending the tightening cycle. The markets expect more cuts this year and the U.S. central bank may follow suit, being under pressure from both the Wall Street and the White House.

The easy monetary policy should lower the real interest rates even further. Today, about $16 trillion of global debt is trading with nominal negative yields. And, according to the WGC, 70 percent of all developed market debt is trading with negative real yields with the remaining 30 percent of debt close to or below 1 percent. In such an environment, gold should look more attractive.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News and Gold Market Overview Editor

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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In 1933 President Franklin Roosevelt signed Executive Order 6102 which outlawed U.S. citizens from hoarding gold.

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