China is wobbling, oil is plummeting, Britain is threatening to quit Europe. And the gold bugs couldn’t be happier. With a 15% gain in 2016, gold’s rally has its diehard fans excited. But for how long?
This is the metal’s best start since 1980, when gold prices rallied about 270% to then all-time highs of $850 an ounce on an oil-supply shock crisis and raging inflation. This year gold prices are higher on worries over economic weakness in China and Europe, and the Bank of Japan’s surprise move to negative interest rates.
All the bad news has stoked some concerns of a recession, if not a full-blown economic crisis, like in 2008. After that meltdown gold prices doubled, lifting values to more than $1,900 by 2011, a nominal all-time record.
Gold prices ended 2015 in a funk, but the global stock markets’ shakiness and global economic worries “were just what the doctor ordered for gold bulls”, said Sean Lusk, director of the commercial hedging division at Walsh Trading.
Gold bugs dream of a time when the metal’s value will soar, lifted by economic doom and hyperinflation from central banks’ extraordinary monetary policy to revive global growth. Gold bugs’ dreams have been deferred, but will this time be different? Is the yellow metal’s current strength a harbinger of another move like 1980 or 2011?
Doubtful, say several gold-market watchers. Gold prices may rise a bit more if the economic uncertainty continues, but the environments that fostered gold’s all-time higher moves aren’t the same now.
Investors plowed into gold-backed exchanged-traded funds. Holdings in these funds are their highest in a year, Commerzbank said, and a catalyst to gold’s move above $1,200.
Joe Foster, portfolio manager of the Van Eck International Investors Gold Fund, said the surprise negative interest rate move by the BoJ, and European Central Bank president Mario Draghi’s talk of more monetary stimulus, encouraged safe-haven buying.
“Markets are losing faith in central banks with the radical monetary policy. We’re not seeing any economic results,” he said.
Yet the rally may stall here. Robin Bhar, head of metals research at Societe Generale, thinks gold has fully priced in the current economic uncertainty, and they would not tell their clients to buy gold now. There are not enough reasons to propel it into a new bull market.
“I think right now it’s as good as it’s going to get. The US economy is healthy,” he said.
Job growth and consumer sentiment is up, despite some recent softer manufacturing data reports, he said. Other investment banks also say gold’s strength is temporary, such as Goldman Sachs, which recently renewed its 12-month price target of $1,000, saying fear is driving the price.
Edward Meir, commodities consultant for INTL FCStone, said he advocates buying gold as an insurance policy against stock-market losses, but he does not see a repeat of gold’s 2010 rally.
“That was panic-buying because of the euro crisis and the financial crisis. If we get another crisis it’s a possibility … This is not a new dream for the gold bulls, unless you have a doomsday scenario. Which a lot of people do. But I think we’ll muddle through,” Meir said.
What made the rally earlier in the decade unique, too, was the debut of the gold ETF, Bhar said. Started in 2004, it was a new way to invest in gold, opening it to a new audience and fostering unprecedented demand.
David Morgan, precious metals analyst and editor of the Morgan Report, a newsletter popular with gold bugs, said for now, he is unconvinced of gold’s strength because silver prices are not rising in tandem with gold.
“I think gold may end the year higher in 2016, but I think it’s going to be a 50-50 struggle between bulls and bears,” he said, adding that gold bugs may be getting ahead of themselves hoping for a significant rally. That may come a few years down the line if conditions are right, he added.
Like 1980 there’s an oil crisis, but this year it’s too much supply, and deflation is more of an issue now. Meir said people hoping for a major rally because of negative interest rates are likely to be disappointed, just as they were when hyperinflation forecasts didn’t pan out. He said European banks aren’t passing on the negative interest rates to consumers.
And he said although ETF demand is strong, global jewelry sales, gold other demand-drivers are flat.
Physical demand from top global buyers China and India is also subdued, said Afshin Nabavi, head of trading at MKS (Switzerland) SA in Geneva. Gold’s big price swings, like the upward spike to $1,260 and subsequent fall to around $1,220, makes shoppers nervous to step in and buy with conviction, he said.
“A lot of people are still scared. Investors need some sort of confirmation or news to see gold break above $1,250 (sustainably). Right now they’re just wetting their toes,” Nabavi said.