Gold analysis: Will the trend reverse?

Gold investors have seen a lot of volatility during the first half of the year. Quarter one initially provided a strong performance as stocks experienced a few pullbacks when geopolitical tensions rose. A new high (since September 2017) has been registered as prices increased by c. 4% for this year in March. This was short lived however since prices dropped and all gains for the year were wiped out in June when gold entered into negative territory (see chart no.1 above).

What factors have been driving the underperformance?

- Strengthen of the US Dollar (see chart no.2 below showing the negative correlation between the dollar index and gold)
- Lower physical gold demand
- Decline in the speculative long positions and liquidation in ETF holdings (see chart no. 3 below)

From a technical stand-point, we can see that over the short-term gold is in a sellers’ market with the price under the 20, 50 and 200 moving averages. The Relative strength index (RSI) is showing that the market is oversold, the MACD is further below the 0 line hence confirming the bearish short-term outlook whilst is not yet clear, looking at the signal line, if we will have a change in trend or not. (see chart no.1 above). I do believe that a good test is at the support level of $1,200 per ounce which is still slightly far off.

We do believe, however, that there may be many reasons to be more optimistic on gold for the second half of the year. Gold’s long-term returns are normally linked to positive economic growth whereas short term performance is more sensitive to risk and uncertainty (as we have seen in the first part of the year).

Below are a couple of points which increase the optimism for gold over the longer term:

  • Economic growth

Global growth has been generally increasing over the past couple of years and this is more common in gold key regions. Over the years, China has become less dependent of foreign investment and has now increased its leading role in Asia. China’s economic expansion is therefore becoming more robust which is likely to be positive for gold. The second part of the year is generally positive for gold in India as the harvest and wedding seasons during the autumn are at full swing. The US economy, although at a smaller pace, has also been expanding which in turn generates higher demand for gold jewellery over time.

  • US dollar movement

The dollar has appreciated quite a lot during the last couple of months mainly due a combination of the continued easing of monetary policy from countries outside the US and the perception that the US may be better placed to benefit, at least in the short term, from trade wars.

While an escalation in tariff disputes will most likely affect economic growth, which in turn will decrease demand for gold, this may be lessened by a weaker US Dollar. Historically, a weak Dollar is negatively correlated to the price of Gold (see chart no. 2 below).

  • Rising Inflation

Over the past couple of years, we have seen a slow increase in the rate of inflation and is now close to 2% in Europe and China, 2.9% in the US and 5% in India. Looking ahead with the prospect of higher tariffs, the risk of higher inflation is on the cards since impacted firms will most likely pass the cost to their consumers. Gold is generally considered as a good hedge against inflation and through time we have seen that when inflation rises, traditional investments like equities and bonds drop and investors flock to safe havens like Gold.

So, is the tide turning for gold?

Gold’s recent decline in prices will most likely generate higher demand for consumers which have historically increased jewellary buying. For the investors, the current levels seem to be providing a good entry point especially as the speculative long positions in the futures market are at their lowest levels since mid-2017. A recent tweet by Donald Trump reminded the market that he is against rising interest rates and as such against a strong US dollar which is all positive for gold holders.

While the summer months usually tend to be quieter for gold transactions, gold prices normally tend to increase as consumers prepare for traditional buying period and investors re-balance their portfolios before the end of year.

A good test of the next support level is around $1200/oz per ounce while major market commentators, including UBS bank analysts are maintaining a bullish long-term view for the year with a forecast of USD $1375/oz.

What type of financial instruments can you use to buy gold?

Investing directly in gold is more difficult than investing in simple shares or bonds. Some reasons for this is because shares and bonds are readily available in the market, easy accessible and can be transferred. You can of course buy gold in a form of jewellery however this is not considered as a financial instrument and it comes at a security and liquidity risk. One way to invest directly in gold is through the derivatives markets using futures and by using contract for differences (CFDs). You will be able to trade if you open an account with IG markets (click here).

With the dawn of more advanced financial instruments, one can also purchase gold bullion (i.e. gold in its physical form) through an exchange traded fund (ETF). These investments are capable to replicate the movements of the underlying investment (in this case the price of gold), without the investor having to hold the gold directly. An example of such is the ETFS Physical Gold (JE00B1VS3770).

Another way in order to increase your exposure in the gold market, is by investing in managed funds which invest in companies that have predominant activity in gold mining. In other words, you would be investing in a collection of equities (stocks) that are all part of the gold mining/exploration sector. The main benefit of this type of investing is that you have a combination of instruments managed by an investment professional and still have your exposure into the gold market. An example of such is the BlackRock World Gold Fund (LU0171305526).

Should you need any more information about the above investments and your specific situation, please do check our advisory section and we will be more than happy to assist. (Click here)

If you would like to open an account and start trading today please visit our brokers section. (Click here)

 

 

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Source: Bloomberg.com, UBS Chief Investment Office, World Gold Council

Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice.  No person should act upon any opinion and/or information in this document without first obtaining professional advice.

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