On Tuesday, the World Gold Council (WGC) published a new investment commentary on gold’s year-to-date performance and the potential tailwinds and headwinds it may face during the second half of 2015. What can we learn from this report?
We have a mixed reading of the new WGC’s commentary. On the one hand, it looks a bit detached from reality, given the recent developments. The best example is the following fragment: “The sentiment is not outright bullish, but (…) anecdotal evidence suggests that investors, while cautious, are more focused on the upside than on the downside”. Yeah, because investors are more focused on the upside than on the downside, the gold price has been declining for ten days in a row and hit five-year low.
On the other hand, there are some interesting insights into the gold market. Regarding the first half of the year, the gold price was down about 1 percent in U.S. dollar terms, however, it rose 7.4 percent in euro terms, which means that gold did not lose its safe-haven appeal. Another proof of that is the fact that German and UK gold ETFs had net inflows in the first half of the year, which means that European investors increased their gold exposure after the Greek debt-crisis had aggravated.
The report explains also why the gold price did not increase despite higher uncertainty about Greece, Puerto Rico or China. According to the WGC, the reason is that the gold price reacts more when the risk is systemic, i.e., when a market event spills over to other sectors and regions. This is why the price of gold reacted strongly during the Great Recession, LTCM crisis, European sovereign debt crises or September 11th, but not after the dot-com bubble burst. As we have written, when the event is localized (to a region or sector), the price of gold is rather steady. Therefore, “the movements in the gold price earlier this year reflected market expectations that the events in Greece or the pullback in Chinese stocks were local – not global”.
What about the gold market’s outlook for the second half of year? Well, the World Gold Council is traditionally bullish and believes that the strong U.S. dollar and higher interest rates will not be as negative for the gold price as it is commonly expected. Why? The report points out that the relationship between gold and the dollar is asymmetric (the gold price usually increases more when the dollar is weak, than it fells when the dollar strengthens), while the gold price should already incorporate, at least in part, current market expectations of a rate hike. We are not so sure about that, given the current developments and the fact that market expects an interest rate hike later than the Fed itself.
To sum up, the new WGC’s investment commentary was published a week ago. We believe that the report properly explains why the gold price did not rise despite higher uncertainty (due to the markets’ expectations of a local, not global, character of Greek and other crises). However, it seems to be too bullish, especially in light of the recent developments in the gold market.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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