It’s undeniable that gold has rallied strongly in 2016 – up 16.4% in the first quarter, which was mostly February and March with the momentum fading during March. That was especially so last week with the price rising 0.2% at best.
After a slow start this week, it had a big day Thursday night as risky investments were sold off and some punters wanted a bit of safety. A weakening greenback helped, especially with investors piling into the Japanese yen.
The 16.4% jump in the three months to March, the biggest quarterly rise since the 15.9% surge in the September quarter of 1990.
The big question for investors and companies is whether prices can sustain that pace,or whether the slowdown in March a sign of exhaustion among investors.
Reuters GFMS said last week in its latest survey of the market told its clients that price look like easing in coming months.
"We believe that the recent price rally will prove to be short-lived and once current market turbulence starts to ease we are likely to see the price retreat again, particularly as physical demand in key Asian markets is already weak. "
"While we are highly unlikely to see all four rate hikes, the Fed remains determined to continue tightening and should we see fresh signs of a firm economic recovery in the United States in spite of global weakness, the Fed is likely to bring forward any further adjustments.
"A strengthening dollar and a return of risk appetite will put renewed pressure on gold’s safe haven appeal and prices.
“While it is likely the price will drop below the $US1,200/oz threshold in the coming months, we do believe that gold will find support due to improving market fundamentals, Reuters GFMS said in last week’s report.
The elephant in the room are the US Federal Reserve and other central banks. Their interest rate policies – along with the normal flow of major data, such as the US jobs reports will impact the value of the US dollar, the yen and the euro.
Every pronouncement from the Fed and others (and their heads) could move currencies, and gold prices – as the Bank of Japan did in January with its January 29 announcement moving the bank of a partial negative interest rate regime.
The other thing to keep an eye on is the current market focus – oil prices and the meeting of Opec members on April 17.
The future direction of the US dollar is a major factor – and there are more and more people who believe the dollar’s big rally has peaked and the currency will drift lower in coming months.
Looking at the past year for gold Reuters GFMS said 2015 was the third year in which the gold market remained in surplus, this time it was an estimated 354 tonnes.
"Among major markets, India regained its position as the largest overall consumer of gold in 2015. Total Indian demand, including jewellery fabrication, industrial fabrication and retail investment rose by 6% to an estimated 936 tonnes last year, with China trailing by 69 tonnes,”Reuters GFMS analysts wrote last week.
"On the supply side, global mine production increased by just 1% in 2015, reaching 3,158 tonnes, with gains in countries such as Indonesia and the United States outweighing losses elsewhere, in particular in China, Ghana and South Africa.
"After a year of net hedging in 2014, producer hedging activity switched to net de-hedging of 24 tonnes last year as two mining companies, who had emplaced large hedge positions in 2014 (thereby swinging 2014 into a year of net hedging), effected their scheduled deliveries into the first year of their respective programmes.
“Global scrap supply rose by 1% year-on-year in 2015, to an estimated 1,173 tonnes, marking the first annual increase since the peak in 2009.
"This occurred despite an 8% year-on-year decline in the average dollar gold price for the period and was primarily thanks to higher supply from the countries that saw their domestic currencies weaken and local gold prices surge.”
But the World Gold Council took a different view, writing in its latest quarterly report overnight (http://www.gold.org/research/market-update-gold-outshines-market-q1-2016):
"We believe that market uncertainty and expansionary monetary policies will continue to support both investment and central bank demand.
"This, combined with an analysis of previous bull-bear cycles, suggests we may be entering a new bull market for gold.”
“History also shows that two consecutive quarters of strong returns have typically resulted in a more sustained rally.
"So far, we have had one very strong quarter. But inflows into gold look, to us, set to remain robust in second quarter, as the current macroeconomic environment remains supportive for both investment and central bank demand.
"The interconnectedness of global financial markets has increased the likelihood of successive economic crises and market contagion, in our view.
"In addition, the prolonged presence of low (even negative) interest rates has fundamentally altered the way investors think about risk.”
That’s all true, but the future course of US interest rates and the US dollar will bear watching day to day.
