Last week, the World Gold Council (WGC) published a new investment commentary on gold’s performance in 2015 and the 2016 outlook. What can we learn from this report?
Similarly to what we did yesterday, the WGC pointed out that the gold was down in 2015 in the U.S. dollars, but not in all currencies. It also wrote: “more than 90% of physical demand coming from outside the US, primarily from emerging economies. For all these non-dollar buyers, it is the local price – and not the US dollar price – that matters most”. It is true, but investors should remember that it is not physical demand, but rather investment demand that drives the price of gold.
The WGC is optimistic about 2016, saying that “in the current landscape, we are seeing encouraging signs for the gold market”. It is hardly surprising, because the WGC, as the market development organization for the gold industry, is always bullish, convincing that “this time is different”. However, this time they could be right. Why?
The WGC points out a few arguments: rising Indian and Chinese demand, rising bar and coins demand, remaining net purchases by central banks, interest rates remaining low, the significant appreciation of the U.S. dollar which will prevent the Fed from moving interest rates too far too soon, slower ETF outflows, elevated stock market valuations and a rise in market and liquidity risks.
We consider neither consumer demand nor the central banks’ purchases as driving the gold price, but other arguments seem relevant. Although negative real interest rates are the best for the price of gold, we believe that the current tightening cycle will be slower and more gradual than expected, which would be positive for the price of gold. We also notice shifts in risk aversion (as indicated by a widening of credits spreads), which should spur safe-haven demand.
The key takeaway is that the new WGC’s investment commentary was published a week ago. Although it provides some interesting insights into the gold market, the WGC’s outlook is traditionally biased upwards. We also believe that 2016 could be better than 2015 for gold, however, the U.S. dollar may appreciated even further, exerting downward pressure on the yellow metal. The sentiment towards gold improved slightly, but it still remains bearish.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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