Capital Market Highlights: Gold

Gold and gold equities have performed soundly in 2016 on the back of global uncertainties arising from geopolitical events. We have seen gold spot reach as high as USD$1,370 per ounce in intraday trading following the Brexit vote before falling on news of the Federal Reserve’s decision to raise interest rates by 25 basis points in December and closing the year at $1,160, a net return of 8.1% year-to-date.

Gold for immediate delivery dropped below $1,300 due to improved sentiment by investors in Trump’s proposed policies and the Federal Reserve’s decision to raise interest rates by 25 basis points. Higher interest rates typically apply downward pressure on gold prices as bonds and other fixed income assets offer more attractive returns. However, Trump’s expansionary fiscal policy leads to expectations of higher inflation over the long run featuring a positive environment to hedge in gold. There are also concerns about Trump’s proposed trade and foreign policies implying further uncertainty on US and global economies as well as intensifying geopolitical tensions, both forces that are positive for gold. In our view over the medium-term, gold has upside underpinned by safe-haven demand amid global political concerns, especially with Trump’s aggressive policies and instability in Europe as well as excessive global debt loads posing a risk to financial stability.

China’s push for reserve currency status continues to be a positive force for gold as China accumulates the metal to partially back its currency. On April 19, 2016, China successfully launched the Shanghai Gold Exchange (SGE), with intention to challenge the existing London Bullion Market Association price fix. China’s aim is to give itself more influence over pricing, by making the London fix less relevant, and as the world’s biggest gold bullion producer this gives backing to both the Yuan and the price of gold.

The current gold downtrend is expected to be mitigated by: i) proposed fiscal stimulus package, ii) increased trade protectionism in the US, iii) global political concerns and instability in Europe, and iv) China’s expected support for physical gold. Gold will likely upswing on signs of weakness in the US economy, Trump failing to deliver on promises, and worsening geopolitical tensions. Therefore, we believe that gold mining companies are attractive and present an opportunity given the potential macro support for gold.