Heightened Risk, Easy Money and Gold
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
In recent months, the World Gold Council released a few interesting reports. What can we learn from the publications? We’ll then supplement it with the view of the Fed policies. Will gold like the message?
Gold Demand Trends Q2 2019
On August 1, the WGC published a new edition of its quarterly report on gold demand. According to the organization, the supply of gold grew 6 percent (recycling jumped 9 percent, while mine production increased 2 percent), while the demand for gold rose 8 percent year-over year to 1,123 tons in the second quarter of 2019.
The main driver of the increase were record central banks' purchases. Central banks bought 224.4 tons of gold, 47 percent more than one year ago, of which only the National Bank of Poland purchased 100 tons. Low interest rates, slowdown in global growth, geopolitical tensions, and uncertainty caused by trade wars turned reserve managers’ appetite toward gold.
The second major driver of the strong demand for gold were healthy ETF inflows. Holdings in global gold-backed ETFs grew by 67.2 tons in Q2, reaching 2,548 tons. The inflows were supported by the geopolitical uncertainty, dovish shift in the US monetary policy, and strong momentum.
Interestingly, around 75 percent of all global inflows during the second quarter were directed towards UK-listed funds. It indicates that investors sought the safe haven of gold amid the uncertainty surrounding Brexit.
When it comes to other categories, jewelry demand rose 2 percent, thanks to strong recovery in the jewelry market of India (demand up 12 percent). Technology demand declined 3 percent, hit by slower global GDP growth and US-Sino trade war. Bar and coin investment sank 12 percent.
As always, we remind investors to take the WGC report with a pinch of salt. Their data is not adequate at best, or flawed at worst. The demand for gold increased 8 percent, while the supply rose 6 percent. The difference is not big and cannot explain the gold price shooting to multi-year highs, well above $1,400. Funnily enough, the WGC admits that “Among the factors driving this rally were expectations of lower interest rates”. Indeed, expectations play much bigger role that changes in the reported gold supply and demand categories.
Mid-Year 2019 Gold Outlook
In July, the WGC published its mid-year gold outlook. The organization notes that in the first half of the year, major central banks have signaled a more accommodative stance, bringing global bond yields to multi-year lows, making gold one of the best performing assets by the end of June. It is very important that – because of falling interest rates, higher risk and momentum – precious metals investors have generally been more bullish this year.
But what about the future? The WGC believes that financial market uncertainty, accommodative monetary policy, and low real interest rates will likely support gold investment demand. We agree. At the end of the previous year, we correctly forecasted that the Fed’s tightening cycle will reach its peak in 2018, making 2019 a better year for gold prices. Actually, our mid-year fundamental outlook is even better, as the Fed has actually reversed its stance and cut the federal funds rate, effectively ending the tightening cycle. The markets expect more cuts this year and the U.S. central bank may follow suit, being under pressure from both the Wall Street and the White House.
The easy monetary policy should lower the real interest rates even further. Today, about $16 trillion of global debt is trading with nominal negative yields. And, according to the WGC, 70 percent of all developed market debt is trading with negative real yields with the remaining 30 percent of debt close to or below 1 percent. In such an environment, gold should look more attractive.