Gold Outlook – What will drive the price of gold over the coming 12 months?
Traditionally at least, gold has the reputation of being a reliable safe haven for investors. When turbulence reigns and ‘safe’ stocks, gilts and currencies start to wobble, investors head for their bunkers; they become more willing to sacrifice yield in favour of an old favourite that has stood the test of time as a diversifier – or so the theory goes.
But it’s not quite that simple. Yes, there’s truth in the premise that investors tend to look closely at gold in times of political and economic uncertainty – but don’t underestimate the basic laws of supply and demand. If it’s also the case that the major markets for gold (e.g. India and China) are flat, then you have got this downward pressure to factor in.
With all this in mind, any assessment of gold’s fundamentals tends to resemble something akin to a world tour. Picking out long term potential positive and negative drivers is far from an exact science but these pointers should give you some idea of what to look out for over the next 12 months.
Gold: the story so far…
The last 18 months or so has seen the price of gold meandering around the $1,200 mark. From a starting point of the low $1,100 mark, the highest point it reached last year was just over $1,350 followed by several peaks and troughs before finishing 1.5% lower over the year.
The trend last year was for more money to flow away from commodities and into stocks and equities. As a useful illustration of this, take a look at what happened over the same period not just to Brent Crude but also to silver. In this respect, the fact that gold managed to break just below even demonstrates (if proof were needed) that special rules tend to apply to this particular commodity – even if it’s difficult sometimes to pin down precisely what those rules are.
So where are we now? Well, there are more than a few commentators who are of the opinion that a bull run should be around the corner; that the next big push beyond the psychologically important $1,300 mark will see the beginning of an upward climb towards the $2,000 peak that was last seen in mid-2011. The jury’s out however – not least because the factors that will decide it seem pretty evenly matched on both sides.
Here’s a closer look at how the land lies…
Factors suggesting gold will stay (more or less) where it is…
The onward march of the US Dollar
Traditionally, a strong dollar is bad news for gold on two fronts. Firstly, gold is of course priced in USD – but unlike many other commodities, the U.S. is the not the biggest market for end users. To put this in perspective, according to the World Gold Council, the total value of the Indian gold jewellry market in Q4 2014 was $6.9bn. The equivalent figure for the US market was just under $2.1bn. If the greenback is on a high, non-US buyers can afford to buy less of it, resulting in suppressed demand and prices.
Then there’s the wider investment perspective. A stronger dollar means investors’ attentions are likely to be drawn towards gilts and cash-based investments. Furthermore, a strong dollar is indicative of wider confidence in the US economy; something that increases the likelihood of investors and traders tweaking their portfolios in favour of U.S.-based equities – at the expense of precious metals.
Global ‘stagflation’: China tries to get back to business as usual…
So far as physical demand is concerned, 2014 saw China drop to second place in the list of global gold markets. That country’s 2014 GDP growth figure of 7.4% may look positively stratospheric from a UK perspective but was actually the first time in 15 years China failed to miss its annual growth target.
One scenario suggests that the Chinese government’s steps to stimulate the economy (in particular, the recent cut in interest rates) will translate into a boost in domestic demand for gold, which in turn will impact on the global price. The more pessimistic view is that continued flat demand for Chinese manufacturing exports will keep the economy – and demand for gold – in the doldrums for the time being. Over the next few months we should start to see which of these outcomes is being played out.
Europe and beyond…
One major problem with the concept of gold as a ‘safe haven’ is the fact that it requires investors to actually invest in it. If, quite simply, there is less money around to invest, then there is less potential for that shift to gold to have an impact. Here, Europe’s continued woes are significant. With the exception of the UK, activity across the continent remains sluggish – to the extent that investors desire and require a cash yield from their investments; something that precious metals are unable to deliver.
Factors suggesting the price of gold will rise
Geo-political tension;
The continued uneasy relationship between Russia and the Ukraine; the ongoing chaos in the Middle East: both of these remain extremely live issues. It’s right to point out that neither of these situations were enough to permanently boost sluggish gold prices last year. Investors and traders should however, be mindful of the fact that any further flash points in these areas have the potential to lead to a spike in gold prices. Whether or not such a spike turns out to be a flash in the pan will depend on what else is happening…
Grexit
Europe’s impact on the gold price can be extremely difficult to untangle. On the one hand, relatively low levels of investment activity across the continent are a negative driver. On the other, when the Euro comes under dire pressure, the ‘safe haven’ effect has a tendency to kick in. This was in evidence in mid April when the news from Athens that Greece was preparing to declare a debt default was enough to cause the price to break the $1,200 barrier.
In simple terms, any strong indicator that the Euro’s stability is under threat is enough to trigger a spike.
India
India imports around 800 tonnes of gold per year. The combination of hefty import duties and high domestic demand means that gold in India trades at a premium. Demand here is also been driven by a combination of recent poor performance of the Rupee, a feeling that its stock market is over-valued and due a re-adjustment, as well as low rental yields from property investments.
It seems that a cut in India’s gold import duty is on the cards in the third quarter, which has the potential to filter through to increased buying levels in India (and with them, upward pressure in the global price) towards the end of this year.
The long term…
The reported demand for Apple’s new gold watch demonstrates the enduring desire for this commodity, with reports suggesting that if Apple’s sales predictions are on target, this global tech giant could be bidding for a third of the world’s annual gold supply to keep up. So are there untapped reserves on the brink of being exploited? It seems not: reports indicate that known minable reserves could be used up in as little as two decades time.
Looking into the future, the fundamentals suggest that gold’s position as a valuable diversifier is secure.