Gold prices started 2016 with a glimmer, rising to two-month highs in the wake of the Chinese stock market rout and the ripple effects it caused in European and US markets.
After touching an all-time nominal high of more than $1,900 an ounce in 2011, gold values have generally declined. Since 2013, the yellow metal posted annual losses. Investor interest soured amid the commodity rout and a stronger US dollar, but so far in 2016, gold has resumed its traditional role as a safe haven in times of financial turmoil.
Its role as a de facto insurance policy allowed gold to buck the commodity sell-off as the new year dawns – industrial commodities like crude oil and copper were pressured hard by the worries over China, which is the biggest commodity consumer.
As such, the metal’s outperformance of almost every other investment this year has turned some heads. Last week gold prices rose over $1,100 an ounce in New York for the first time since November at the height of Chinese concerns, although they have pulled back to about $1,077 as concerns abate for now. But there’s some discussion about whether its shining start is the beginning of a rebound or just a temporary bounce.
Those who see a modestly higher path for gold said US dollar pressure may wane in the coming months, while others say the general deflationary commodity environment is negative for gold prices.
The impact of further Federal Reserve interest rate hikes is also debated, as some suggest that since the Fed has finally acted, the market can focus on other factors. However, others say even modestly higher interest rates make gold undesirable versus other safe investment choices like US Treasuries, since the metal has no yield.
James Steel, chief precious metals analyst at HSBC, says he is “moderately bullish” on gold, with a 2016 average price forecast of $1,205. In addition to the safe-haven buying, gold offers non-US buyers a currency play.
“It’s one way to hedge yourself against a weaker domestic currency since it reflects a dollar value,” he said.
He was also impressed that gold did not sell off sharply after a stronger-than-expected US jobs figure and has held up despite oil’s drop to 12-year lows. His higher 2016 price forecast is based on the idea that the US dollar will soften and emerging market demand will improve later this year.
Kevin Grady, owner of Phoenix Futures and Options, said the rebound in gold inspired some light investor interest again in the futures market.
“When the stock market would have its big down days, in gold we would start to see some buying come in. It seems as if people are picking at it,” he said.
Purchases of gold-backed exchange-traded funds also rose. The largest of these ETFs, SPDR Gold Shares (GLD), witnessed nearly a 10 metric-ton increase from 31 December to 11 January, to 651.68 tons.
The Chinese lunar new year may also spur gold-buying in Asia which could support prices, too.
The question is: will investors stay? Despite the gains, many gold-market watchers say the rally is transitory because of the lack of inflation. Gold feeds on inflation, and without its favorite food, the metal may be on a diet for now. Barclays still pegs its 2016 average price at $1,054 an ounce, just off the 2015 low of $1,050.
Rob Haworth, senior investment strategist for US Bank Wealth Management, said the deflationary risks in Europe and the low oil and gasoline prices in the US make it hard to see any inflation. Plus, the January jobs data gives the Fed room to raise rates. He sees gold prices weaker through mid-2016.
He said he would change his mind if “the market starts to believe the central banks, and inflation expectations – rather than headline inflation itself – start to tick up. That will start to change our view on gold to more neutral.”
Rohit Savant, director of research with commodities consultancy CPM Group, said gold prices could rise a touch from here. His average 2016 gold price is $1,140, saying with the Fed finally on the path of raising rates, gold no longer has that specter hanging overhead.
The problem for gold is there is no “new” information to push prices either way, leaving it stuck between the negative and positive factors long worked into prices, he said.
Despite gold moving to two-month highs, it’s not likely to be the sexy investment of a few years ago. Grady said he “can’t get excited about gold” until it rises above $1,205 because that was an area of heavy trading activity when prices were falling, and will probably be difficult for the market to rise above.
“Those are key numbers. The problem is those numbers are $100 away,” he said.
