By: Richard Koch – Forex Focus
The precious metal rallies on renewed buying from Russia, even as investors shun equities.
Spot gold rallied to more than a 10-month high in January after oscillating in a broad $1,180-1,235 range for a major portion of the second half of 2018. Although prices have corrected from the recent high of $1,326, they continue to remain above the key psychological level of $1,300, even as global equity markets are holding on to gains after rebounding in December, following a sharp correction.
While there are numerous reasons for the more than 14-percent rebound in the price of the precious metal in the last five months, from the August low of $1,160 per troy ounce, let’s look at some of the key fundamentals related to demand and supply to assess the likely causes for the sudden jump in gold prices along with the outlook for the rest of the year.
Global demand for gold rose by 4.0 percent to 4,345 tons last year from approximately 4,160 tons in 2017, led by a 74-percent year-on-year surge in central-bank buying, the highest since 1971—the year that also marked the end of the gold standard. Net central-bank gold buying touched 651.5 tons in 2018—with Russia, Turkey and Kazakhstan being the leading buyers, as heightened geopolitical tensions and economic uncertainties pushed central banks to diversify their reserves into safer liquid assets.
On the investment front, the AUM (assets under management) of gold funds listed in Europe surged 10 percent last year to 1,097 tons, due to widespread political uncertainty in Europe, especially after euro-sceptic governments won support. Also, indecision surrounding the Brexit deal and the negative yields on government and corporate securities underpinned the demand for gold. In addition, the US-China trade conflict and the volatility in global equities were an added buffer that led investors to shy away from the other asset classes and invest in the all-weather safe-haven commodity.
Likewise, retail interest in gold rose to the highest level in five years, with household investments in gold coins jumping 26 percent year-on-year to 236.4 tons last year, according to data published by the World Gold Council. Although a majority of the purchases were reported in second-half 2018, it marked the second highest annual investment in the precious metal.
On the supply front, backed by record mine production in 2018, total gold supply rose marginally to 4,490 tons, even as the global hedge book declined by more than 29 tons during the same period, recording the second successive year of producer de-hedging.
Outlook for gold prices in 2019
Coming to analysts’ price predictions for the precious metal, the opinions vary from bearish to bullish, as always.
Beginning with the bullish views:
- Commodities analysts at JPMorgan Chase expected gold to remain in the $1,200-1,250 range in the first half of this year, before rallying to $1,400 in the last three months. The forecast, published in December of last year, reiterated the bank’s neutral outlook on the precious metal.
- Chris Weston, head of research at Pepperstone, forecasted gold prices heading north of the $1,300 mark, provided equity markets remained volatile and the US dollar along with inflation-adjusted real yields trended lower. His base outlook for gold in 2019 was $1,350, while the bullish scenario involved gold rallying to $1,500 and the bearish projection was for gold ranging between $1,200-1,250.
On the bearish front:
- The Global Head of Commodity Markets Strategy at BNP Paribas, Harry Tchilinguirian, maintained a bearish view on gold and preferred US Treasuries to the precious metal. The bank expected prices to average $1,145 in 2019 as inflation was expected to remain muted, negatively impacting gold.
From the fundamental perspective, the outlook for gold looks very promising. The recent gold purchases by a few central banks could only be a precursor, with many others signalling their intentions to increase their reserves of the precious metal this year, as political and economic uncertainties are driving them to the safe-haven asset.
In addition, countries such as Russia, China and India, along with their Middle Eastern trade counterparts, have begun introducing currency swaps to boost bilateral trade and investment, deleveraging the US dollar and mostly doing away with the US payment system. Likewise, Germany, the United Kingdom and France have created a new payment system, INSTEX (Instrument in Support of Trade Exchanges), which will facilitate companies in Europe in continuing to do business with Iran, following US sanctions on the Middle Eastern country last year.
As countries slowly but surely move away from their dependence on the United States and the US dollar, the negative impact on the world’s largest reserve currency will be clearly felt, at least in the next six to twelve months. Will this dollar weakness benefit gold, as some analysts predict it will?! We’ll certainly find out in the next few months.