Investors Beware! Gold Has Seen Its Peak - RBC
Wednesday August 03, 2016 12:40
(Kitco News) - Despite gold’s stellar performance this year and the risks surrounding financial markets, analysts from one bank think the metal’s 2016 rally may be coming to an end.
“While we believe the rally has been completely justified, it was largely driven by just two forms of investor demand and we struggle to see how it goes significantly north of recent highs,” said Christopher Louney, commodity strategist for RBC Capital Markets, in a report released late last week.
“We take the seemingly unpopular view, and contend that gold has already seen its 2016 peak.”
Since the start of the year, gold prices have rallied over 28% and hit a two-year high of $1,377.50 an ounce in early July. Prices have since come off with December Comex gold futures last trading down $9.50 at $1,363 an ounce.
RBC analysts are forecasting an average annual gold price of $1,258 an ounce this year and $1,241 an ounce in 2017, noting that without new “risk-off events,” gold drivers will be weaker from here on out.
Louney noted that investors should be “cognizant of just how much/little runway remains for gold appetite” especially since gold’s rally has stemmed almost entirely by investor demand, in the form of exchange-traded product demand and Comex positioning, which has already reached record highs.
“Can an endless investor bid drive gold materially north of recent highs of around $1365/oz?” he questioned. “In Commodity Strategy, we think not – at least not absent another significant risk-off event,” he said, adding that it is unlikely for investor demand to push higher given that it is already a crowded trade.
In other words, investor demand has led gold’s rally yet more “sticky” forms of demand have failed to follow through, Louney explained.
Even looking at gold in currency terms, the metal has performed well in U.S. dollars but has seen an even better performance in other currency terms. However, Louney argued that this may not be working in the metal’s favor, especially in the world’s two largest gold-consuming nations – China and India.
“A strong dollar will remain a hurdle for gold, as the rolling negative correlation will likely re-strengthen,” he said. “Secondly, while it sounds great on the surface for gold to perform well in non-USD terms, performing well may actually imply demand destruction,” he added.
Another factor that has helped push gold prices higher has been more global monetary policy from central banks and negative-yielding sovereign bonds. Nonetheless, Louney said he doesn’t see this factor continuing to help gold prices later this year.
“Even if more accommodative global monetary policy were to take the form of more negative rates, it looks difficult for gold to benefit from rates entering deeper negative territory given that most investors that were going to buy gold because of negative rates, probably already have.”
However, Louney still leaves the chance of a gold rally open, especially as the metal continues to fulfill its role as a crucial safe-haven asset in times of uncertainty.
“Admittedly, risks to this view include the US recession cycle, a sharp recession in the UK or EU and/or referendum fever spreading around Europe, but this is not our base case,” he said. “[T]hus we do not see enough drivers on the horizon to justify another leg higher in gold prices.”