Gold continues to attract the lion's share of metals-market attention, having risen by over US$120/oz in June. The precious metal appears to be forming a platform above US$1,400/oz, and most analysts are bullish for its performance over the next six to twelve months. These supporters include the World Gold Council (WGC), which last week published its mid-year outlook for the metal.
WGC argues that financial market uncertainty and accommodative monetary policy will "likely support gold investment demand" for the remainder of 2019. In its mid-year report the WGC suggests the recent price momentum "may fuel rallies and create pullbacks, as investors continuously reassess their expectations based on new information".
The WGC notes that the first half of 2019 "proved quite eventful" for financial markets. Stocks retraced their Q4 2018 losses by the end of April only to pullback again in May. A few weeks later, stocks reached new highs yet again. At the same time, central banks across the globe have signalled a more accommodative stance, bringing global bond yields to multi-year — and, in some countries, all-time — lows. As investors looked to balance higher stock prices with an increasingly uncertain environment, gold prices surged, making gold one of the best performing assets by the end of June.
As the graph below illustrates, this performance is not just in terms of US dollars. Even measured in terms of two of the world's stronger currencies, the Swiss franc and Kuwait dinar, gold has performed very well over the past nine months.
Gold's price increase in June was particularly sharp — driven by falling interest rates, and higher political and economic risk — but investors have generally been more bullish this year. This is evidenced, according to WGC, by the positive inflows in gold-backed ETFs (capturing US$5.0 billion in the first half of 2019) as well as higher net-long positions in COMEX futures (which averaged 369 tonnes during the first half). In addition, central banks reported net purchases of some 247 tonnes (equivalent to US$10 billion) in the first four months of the year.
As WGC observes, global monetary policy has shifted by 180° over the past year. In the middle of 2018 the US Federal Reserve was expected to continue increasing interest rates, but by the start of this year the most likely outcome was for US interest rates to remain on hold. Now, the market expects the Fed to cut rates two or three times before the end of 2019.
In its report, WGC states that "contrary to popular belief, gold's performance is well explained by its supply and demand dynamics".
An important determinant of gold's long-term price performance is the demand for jewellery (accounting for an annual average of 51% of total demand over the past 10 years), technology (9% of total demand) and long-term savings (bars and coins account for an annual average of 27%, and ETFs 3%, of total demand). However, except for extreme changes in this consumer demand, these factors have relatively little impact on gold's short and medium term price performance.
Conversely, gold-investment demand can sway prices in a meaningful way in the short and medium term, but its effects level off in the long run.
The WGC argues that "gold supply through mining or recycling bring balance to the market". This rather overstates the importance of the supply of new-mined gold as only about 5% of the estimated 200,000 tonnes that has ever been mined is unaccounted for, with some 190,000 tonnes of gold being available in above-ground stocks (including 48% in jewellery).
Mining is only adding to this stockpile at a rate of some 3,300 tonnes (106 Moz) per year. By contributing under 2% per year, the world's gold mines could go on strike for a year and it shouldn't impact the metal's price. There would be a very different commodity-price scenario if, for example, all of the world's coal mines closed for a year as this commodity is actually consumed. I observed the different supply impacts for gold and coal prices in a recent interview with Proactive Investors.
So the price of gold is driven by demand for the metal, whether actual or anticipated. The WGC concludes in its mid-year report that consumer demand "may be soft" over the next year but that "speculative activity could amplify price movements". Investment interest in gold is clearly crucial to the metal's performance, and WGC believes this demand is "likely to remain robust and central banks will continue their net purchasing trend".
This positive scenario for gold will be welcomed by precious-metals producers, although most companies stress that the focus needs to be maintained on the efficiency of mining operations. At last year's Mines and Money event in London, Peter Marrone, the executive chairman of Yamana Gold, told delegates that it was "operations that drive financial performance" (see his slides and interview). Yamana Gold is presenting again at M&M London this year.
Want to hear more about the outlook for gold? Hear from leading gold miners at the International Mining and Resources Conference (IMARC), taking place in Melbourne 29-31 October, and Mines and Money London, taking place in London 25-27 November.