The investor demand for gold as a safe haven asset in 2016 has been well documented with the yellow metal up around 30% so far this year.
Gold has recently broken through the psychologically important barrier of $1300/oz and is still finding overall bidding interest despite the slight declines in the price during the last few weeks. This is no surprise given the overall weak economic growth outlook globally, very low levels of inflation in the developed economies, global political as well as military instability and the US Fed’s still uncertain outlook regarding policy normalisation.
The US data picture has recently picked up speed to indicate that the Fed could still opt to raise rates by a further 25bp at the December meeting.
So given that the larger macroeconomic picture looks to be supportive of gold, investors shouldn’t read too much into the latest fall in prices. Where prices could end up though is more of intriguing question but the next few months certainly contain more upside claims than in recent years. With the Bank of Japan (BoJ) as well as European Central Bank (ECB) leading the way for ever lower interest rates and the Bank of England (BoE) potentially looking towards stimulus measures, this is a further potential stimulus for gold in the coming months.
As a result, gold production could be expected to pick up in the coming months given that mining output is likely to be more profitable entering the final quarter of the year. An important indicator also to take note of regarding the US stock market is the fear/greed index, which shows that investors are betting that stock prices could rise much higher in the near term and that the level of greed is currently at an extreme.
When the fear/greed index is at such levels it acts as a potential indicator that the US stock market could be heading for a meaningful correction within the next year or so, which is another ingredient in the gold bidding interest recipe.
Therefore, it comes as no surprise when Randgold Resources CEO Mark Bristow, revealed that the company plans to invest $70 million for feasibility studies and drilling at its Massawa gold mining project in Senegal. Randgold’s feasibility studies for all projects are based on an assumed gold price of $1,000/oz and the company will concentrate on exploration in West Africa.
Increased investor appetite for gold is also perhaps persuading companies to restore higher cost production facilities. Investors pumped $12.4bn into gold ETFs in the first quarter, the biggest inflow since 2009. Investors are still buying ETFs though with around $4.5bn flowing in over the past four weeks, according to Markit.
Interestingly, Swiss customs data shows that the UK was the biggest destination for gold exports from Switzerland last month, the most since September 2012. At 78.761 tonnes, more gold was dispatched to the UK in April than to Hong Kong, India and China combined.
The above reflects a sharp change from recent years. Since 2012, India and China have accounted for an average of 58% of monthly gold exports from Switzerland compared to 31% last month – representing the lowest market share since since mid-2014. Jewellery-driven demand for gold fell 19% in the quarter, according to the World Gold Council, with demand in India dropping 39%. China’s ICBC Standard Bank recently agreed to buy one of the world’s largest London gold vaults from Barclays.
From the above data, one can discern the overall gold risk off play bias is the broader theme encapsulating markets currently. This suggests that gold output may increase further in the coming months given how producers have been and still are under pressure from the lower prices that were seen in the last two years.
Article first appeared on InvestorIntel