#Market Strategy — 03.06.2016

Gold: not more than a temporary phase of weakness

Roger Keller


Last December, gold reached its lowest point since early 2010, touching USD 1051. Early January, it began an abrupt uptrend that brought it to the USD 1250 region by early March, on the back of what we now know was the second strongest quarter for demand on record.


Spreading concerns about the health of the global economy;

Mounting credit stress, expressed for example by a widening in US dollar high yield spreads, from 750 basis points to 900 basis points;

A weakening of the US dollar because, on the one hand, the Federal Reserve postponed its rate hike decision due to disturbing developments outside of the US; most notably in China, where authorities had to intervene to defend the currency;

On the other hand, other major central banks felt compelled to loosen further their already very accommodative monetary policies. Among others, the Bank of Japan surprised investors by adopting negative rates on certain excess cash holdings held by commercial banks;



At the beginning of May, the gold price began ceding some ground, mostly because of the content of the April FOMC Minutes and because of comments by several Fed members talking up the prospect of rate hikes in 2016. Last Friday’s comments by Janet Yellen, the Chair of the Federal Reserve, went in the same direction; she thinks that the improvement recently seen in the US economy will probably warrant another rate hike “in the coming months”.

This period is likely to prove a phase of consolidation for gold but not more than that because the economic background will in the end force the Federal Reserve to proceed cautiously with its tightening policy. Our own stance is that there will be only one rate hike in 2016, in the later part of the year.


The economic background remains weak. This is the message of leading indicators such as the recently released flash PMIs. In the US, the flash manufacturing PMI declined to 50.5, a level marginally above the 50 barrier, which separates expansion from contraction; it thus reached its lowest level since September 2009. Meanwhile, the services PMI fell to 51.2 from 52.8. In the Euro Area, the flash composite PMI declined to its lowest level since January 2015 and in Japan the manufacturing PMI returned to its lowest level since December 2012, which corresponds to the launch of Abenomics. The German ZEW investor sentiment indicator delivers the same message. 


These indicators are in line with our own view that the global outlook is downbeat, which will leave real yields low. In other words, the opportunity cost of detaining gold will stay marginal and this supports as a result a fundamentally positive trend in the gold price, given that behind the lackluster cyclical economic outlook lie big structural issues, such as deleveraging or demographics. 

From a technical perspective, this stance is backed by the recent reversal up in the 200-day moving average, for the first time since early 2012. 

From a supply-demand perspective, there is also support: supply is declining by 3% this year whilst demand from central banks and investors are in a rising trend, more than compensating for a lack of any dynamics in jewellery demand.


Given a world of anemic growth - in which bonds are expensive, equities are in need of confirmation of positive investor expectations, the debt mountain has continued to grow and political as well as geopolitical risks abound - assets that provide diversification are a welcome component of portfolios.

Gold fits this criterion based on its low correlation with other assets (except the US dollar, although this relationship is unstable). In case of adverse macro developments, it would provide a good hedge. 

Our core assumption is that the gold price will move in a USD 1150-1400 range over the next 12 months, first in the lower part of it and then progressively in the higher part.

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