All Hail the Gold Market!

Why is it that once things start picking up, everyone starts asking when the next big crash will be?! In the case of equities, I don’t think we’re anywhere near it. But what about the other sector that’s enjoyed a healthy recovery so far this year: Metals – especially everyone’s favourite, the Gold market. The yellow metal began a period of consolidation at the beginning of May after rising nigh on 25% from end-2015 lows of around $1050 an ounce.

With equity traders tentatively confident, should we expect a larger leg down for safe haven Gold? Probably not, and there are a multitude of reasons for that. Safe haven demand returned at the beginning of the year and it’s still there. Another major driver has been the pullback in US Dollar strength that’s also been going on all year – led by markets discounting the chance of several US Fed rate hikes this year – and looks set to continue given today’s disappointing US Jobs Report. We still say there’ll be no rate hikes at all this year! A weak US Dollar does of course make Gold better priced for those using other currencies.

Next, we have that good old technical factor: Momentum. When the Gold market began to recover, that recovery would have been boosted by short covering with the resulting upwards surge jumped upon by trend followers. Now that short covering has happened though, could there be enough momentum left to see the yellow metal back towards the dizzy heights of $1900? What else has Gold got in its favour that could uphold said momentum?

Income seeking investors have also been kicked in the teeth recently as some very large and hitherto reliable dividend paying stocks have had to cut or even scrap their dividends altogether. So those who will have bemoaned Gold’s inability to deliver income have had little choice but to now see it as another perfectly reasonable investment.

We think Gold’s certainty of existence is also surely a contributor to its enduring attraction. Gold has always been considered a long term hold, and with low and even negative rates now pervading the markets, you’d need a pretty long term bond to see any kind of return (Ireland and Belgium have both recently issued bonds paying coupons for 100 years). Thus the Gold market can once again compete as a low risk area in which to invest. What’s more, Gold is a real thing. You can hold it in your hand. It could be that people – especially the younger folk –  are now wary of ethereal assets that merely exist in a computer’s hard drive. You can keep Gold under your bed. So could it be a case of ‘back to basics’ for a new generation of investors?

It’s early to make that call today, but if Gold continues to knock on the door of $1300 an ounce then it might be time to re-evaluate. If you want to keep an eye on the Gold price – or anything else financial markets – amid the buzz of everyday life, then allow us the honour of doing it for you. It’s our raison d’etre. Sign up for our free, no nonsense research now and experience what it’s like to have a broker that’s on you side.

Have a great weekend!

Augustin Eden, Research Analyst (6 May)