Has Gold Regained its Lustre?

Precious metals are one of the ways to preserve capital. In periods of turmoil, this alternative investment instrument offers soothing refuge from stock market volatility and can help a savvy investor grow their assets.

n the past month, the price of gold has changed little in market terms, although 18.56% appreciation in value since the start of the year does show growing optimism for precious metals. Persistent volatility on capital markets and wary attitudes from central banks suggest that the 1st-quarter “gold fever” could resume.

Since 15 December, when the Federal Reserve raised U.S. interest rates for the first time since the financial crisis, the price of gold, despite a pessimistic outlook and low expectations from leading analysts, has risen from 1067 $/oz to 1258 $/oz. Notably, a large portion of this growth was observed in January, right when stock markets were having a powerful downward correction. 

Demand for gold mounts as investors lose confidence in the effectiveness of monetary policy espoused by the world’s leading central banks. Lacklustre performance, low inflation and economic growth mean that investors will once again retreat into hedge instruments, a stage where gold plays one of the lead roles.

Monetary policies are maintained predominantly in expansionary mode. Even the Fed, which recently entertained the notion of increasing rates in several rounds by the end of 2016, has returned to cautionary attitude, arguing that a sudden rate hike could have a negative impact, deterring growth in the American economy. Faced with low interest rates and quantitative easing, investors will be forced to seek alternative allocations such as precious metals.

For this reason, gold might become a focal point for purely speculative interests. Without a foundation for economic growth, which encouraged investors and consumers in the last few years, can we honestly expect a calm market correction with zero panic?

The correlation of gold prices and monetary policy no doubt presents several considerable risks for investors. If central banks despite their cautiousness decide to continue increasing interest rates or reduce economic stimuli, the price of precious metals could decline rapidly.

A technical analysis of the graph showing a 185 $/oz increase in price since the beginning of the year reveals some consolidation of the price at new levels. Should we see a breakthrough beyond 1260 $/oz, the bullish trend would probably continue, heading for 1300 dollars per ounce or more.

Higher prices have reflected positively on gold-miners’ stocks. Since the year began, the Arca Gold Miners Index has rallied more than 60%. Corporations are trying to make their production more efficient, reduce costs, sell off and close down losing assets. Gold miners in developing countries benefited from low national currency rates in 2015, reducing their relative production expenses. At the moment, most gold producers have production costs of just over $800 per ounce, giving them a sizeable margin of safety.

Our team is of the opinion that precious metals rally is not over. In view of new stock market highs, low interest rates, and a lack of factors boosting the global economy, we believe that demand for gold will continue to increase in the foreseeable future.

The current global situation allows investors to revise their investment portfolios to account for precious metals investment opportunities. For those interested in seeing higher gold prices, physical investment gold might not be the best instrument – although it is the most reliable form of investing. To react more quickly to changes in gold prices, however, one may invest in precious metals accounts or exchange-traded investment funds.

Full text of article - "Kapitāls" (LV)", June 2016

Andrejs Kočetkovs
Head of the Investment Sales and Advisory Division
Baltikums Bank