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Can gold keep up its strong start to 2015?

17 January 2015

Investors returned to gold in droves at the start of the year, but experts are divided on how strong the prospects are for the metal.

By Gary Jackson,

News Editor, FE Trustnet

Gold has had a strong start to the year after investors dropped equities and turned to perceived safe havens on the back of a multitude of concerns, but there is no clear consensus on what the rest of 2015 looks like for the metal.

Global equities, as represented by the MSCI AC World index, managed to eke out a slight gain of 0.14 per cent in the first two weeks of 2015, aided by the 0.17 per cent rise in US stocks. The FTSE All Share, on the other hand, lost 2.39 per cent over the same period.

Meanwhile, S&P GSCI Gold Spot index climbed 6.93 per cent as the yellow metal’s price went past the $1,250 dollar an ounce mark. While still some way short of the record $1,921 reached in September 2011, the rise suggests to some that the precious metal could recover somewhat in the coming years.

Performance of indices over 2015



Source: FE Analytics

Hans Olsen, global head of investment strategy at Barclays Wealth and Investment Management, said: “To describe the start of the year as inauspicious is a bit of sublime understatement. The mood of investors globally was dour and their actions could be best characterised as risk-averse.”

“Furthermore, the picture of equity markets in the Americas, Europe, and Asia was that of a sea of near-perfect red. In a quasi-symmetry of action, the shunning of equities was offset by the embracing of treasuries, gold and silver. ‘Risk off’ was the prevailing strategy of the opening days of 2015.”

Olsen adds that the “usual, recycled reasons” seemed to be the catalyst for the negative sentiment: the existential threat to the eurozone that could emerge if Syriza are victorious in the Greek election; the plunging oil price; and the risk that the globe could be facing deflation, like recently sprang up in Europe.

“Any one of the above threats could cause a market swoon; combine the lot, and the investor mood, along with the returns on risk assets, set teeth on edge,” the strategist concluded.

Given the negative backdrop to the markets at the moment, could investors expect to see further improvements in the gold price?

Julian Jessop, head of commodities research at Capital Economics, says the resilience of gold in light of the appreciating dollar and the plummeting oil price – which would be expected to act as headwinds for the precious metal – suggests further recovery could be expected in 2015 and the following year.

“This resilience may seem surprising given the generalised strength of the US currency and the decline in inflation expectations due to the slump in oil prices,” he said.

“However, these potential negatives for the precious metal have been more than offset by renewed demand for safe havens due to the instability in equity markets, worries about growth, and fears about deflation in the eurozone in particular.”

Jessop adds that the macroeconomic forecasting consultancy is wary of “getting carried away” with its gold outlook, noting that its recent advance is small when put next to the significant falls that occurred over the past few years.

He concedes that gold could simply drop back again once investors’ risk appetite starts to rebound or could find its upside limited by the expectation of the Federal Reserve lifting interest rates in the US at some point in the year.

“Nonetheless, the partial recovery has once again demonstrated gold’s enduring appeal as a safe haven, as well as the decent support that appears to materialise around the $1,200 mark,” he explained.

“What’s more, global bond yields are likely to remain historically low despite Fed tightening. Indeed, renewed nervousness in equity markets prompted by the first rate hike could support gold again. In the meantime, demand for the precious metal from key emerging markets – India and China – looks set to pick up further, while new supply will be limited.”

Capital Economics expects the gold price to end 2015 at $1,300 before climbing to $1,400 by the close of 2016.

However, asset allocators are less confident in the metal’s outlook. Neil Gregson, manager of the £833.7m JPM Natural Resources fund, sees few reasons to be optimistic on the outlook for gold and the companies that specialise in mining it.

“Given the trajectory of US monetary policy over the next 18 months, it is difficult to construct a compelling investment case around gold and gold equities. That said, Asian demand is leading to some physical shortages, evidenced by the fall in Comex inventories and gold bullion lending rates recently turning negative,” he said.

JPM Natural Resources is underweight gold with just 16.1 per cent of assets held in gold miners. Randgold Resources is the only gold and precious metals specialist in the portfolio’s top 10 holdings.

Whitechurch Securities also have a negative view on gold, driven by the likelihood of strong dollar and interest rate rises threatening its continued rise.

The group’s latest asset allocation note explained: “Gold returned some of its shine in 2014 providing a positive return, but for what reasons we cannot explain. Given the dollar strengthening, speculation of interest rises and deflationary pressures, it is hard to argue the case for holding this non-yielding asset and we maintain a zero exposure.”

Andrew Merricks, head of investments at Skerritts, is also downbeat about the outlook for the commodity, pointing out that a strong dollar has historically been bad news for gold’s performance. He expects the dollar to appreciate this year.

“A strong performance from commodities and gold on the back of a rising dollar is virtually unheard of. So, if we’re right about the strength of the US currency, then we are very happy to continue to avoid anything to do with the natural resources and precious metals sectors,” he said.

“The only proviso would be in the event of a serious global event occurring, in which case gold could see its position as key safe haven re-emerge.”
 

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