Hoarder & jeweller bargain hunting could underpin gold

THE 2020 surge in investment and speculative holdings of gold is a mixed blessing for price prospects this year.

The reason is that investors have been taking profits after the heady price increase in 2020. They originally purchased gold because of the pandemic, geopolitical uncertainty, negative or negligible interest rates, monetary stimulus, inflation, large budget deficits and concerns about a weak dollar and other fiat currencies. These concerns remain despite vaccinations, but sentiment has changed.

After peaking at US$2,067 an ounce last August, gold has since fallen by 11 per cent, although it is still 19 per cent higher than levels in January last year.

Bitcoin, which had a remarkable run, also diverted some potential bullion buyers, but the volatility and recent slide of crypto currencies may well encourage a return to gold, which is relatively more stable.

“The medium- and longer-term outlook for gold is positive,” said Georgette Boele, foreign exchange and precious metals strategist at ABN Amro. “But gold is a crowded trade, and investors have doubts.”

Illustrating investor enthusiasm for bullion last year, gold exchange traded funds (ETFs) experienced a surge in demand. Their year-end global holdings rose to 3,752 tonnes or 120.6 million ounces worth US$221 billion (S$293 billion), said the World Gold Council (WGC), which researches and promotes gold for mining companies.

But as prices declined from peaks, ETF holders offloaded 149 tonnes or 4.8 million ounces in November and December in relatively thin markets, the WGC reported. US Commodity Futures Trading Commission (CFTC) data also shows that hedge and managed futures funds sold 4.4 million ounces equivalant futures and options-derivative positions on Comex, the New York futures exchange in the week to January 12. The sales cut their net bull positions to 10.5 million ounces, well below their 2020 peak holdings and helped place pressure on the price.

Source Bloomberg
If bond yields rise, gold tends to fall. Note, however, that real, inflation adjusted, yields are negative and medium and long term that is positive for gold.

Investment banks such as BofA and Goldman Sachs have forecast a gold price surge to US$3,000 and US$2,300 an ounce respectively this year. They were especially enthusiastic when the price was soaring in the northern hemisphere summer.

Now, analysts are uncertain about price prospects for coming weeks, as prices dipped to US$1,819 an ounce on Friday and have revived slightly to $1842. They are now fairly close to the bottom “support” level of US$1,767 and have been declining after a rally to US$1,970 early January was not long lasting.

If investors and speculators continue to sell gold, Chinese and other Asian hoarders and jewellers, who buy physical bullion, may well begin to bargain-hunt in coming weeks. This would be timely, and come ahead of the February celebration of the Year of the Ox.

Jewellery and hoarding demand in China and India, which was 1,590 tonnes (51 million ounces) in 2019, is estimated to have slumped by at least half last year because of the pandemic and high prices. But demand in the two biggest physical gold-consuming nations picked up in the third quarter, said the WGC.

If this buying stabilises the market, gold could recover. Ross Norman, the best forecaster of the London Bullion Market Association last year, predicts that the low of gold this year will be US$1,810. But after a recovery, it could reach a high of US$2,285 an ounce and the annual average will be US$2,025. The chief executive of Metals Daily, a niche publication, believes that when the recovery comes, there will be demand pull and supply inflation and a higher velocity of money will lead to much higher price rises.

“Financial markets remain vulnerable and we think investors will continue to see gold as the near-perfect antidote,” Mr Norman said.

Central banks were significant gold buyers for the 10 years leading up to 2019. The main purchasers were Russia, China, Turkey, Kazakhstan, India and other emerging nations.

Indeed, central banks bought more than 1,200 tonnes in 2018 and 2019 before some turned sellers in the second half of last year. Ukraine and several other nations used their gold to finance the costs of the pandemic. Their gold sales in total, however, were well under 100 tonnes.

Although several analysts and traders have become bearish in the short run, there could be an unexpected rally.

CFTC data shows that traders’ gold swap positions were net short of derivatives equivalent to a whopping 18.8 million ounces. If gold bulls decide to take advantage of the current near-nadir in the trading range, the bearish traders may be forced to buy and cover their shorts.

Silver was by far the best precious metals performer in the past 12 months. ABN Amro analysts expect it and especially platinum, to outperform gold this year. Both metals are used in industry and the global economy is forecast to improve from the second quarter of this year.

Platinum, currently US$1,075 an ounce, is placed in catalytic converters to clean auto emissions and is also in demand for fuel cells and hydrogen powered vehicles.

© Neil Behrmann. This article was first published in The Business Times Singapore . For other excellent Asian and other articles try https://subscribe.sph.com.sg/publications-bt/

For insight into booms and busts take a look at Neil’s books. They can easily be found via his author page on Amazon  https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M

Neil’s financial thrillers Trader Jack- The Story of Jack Miner and its sequel Jack of Diamonds have had excellent reviews which include comments on the in-depth research into gold and gold share trading, diamond markets and financial bubbles and crashes. Children 8 to 12 have also enjoyed the anti-war fantasy, Butterfly Battle- The Story of the Great Insect War. It had exceptional reviews.                                                                         

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