One year on, history has repeated itself. In the first quarter of 2016, the gold price jumped 12 per cent in dollar terms; this year it is up 9 per cent over the same period. In both cases, the advances were the reversals of recent bear markets, as though traders had pawned their gold to pay for Christmas.
For followers of precious metal stocks, the lull amounted to an excellent buying opportunity ahead of a reporting season that has seen big dividend promises and project sanctions; with a couple of notable exceptions in the junior market, most of London's major gold miners have seen gains of at least 20 per cent so far in 2017. Of course, the perennial question for gold bugs and bears alike remains whether the trade has further to run, or if momentum will fade in the next nine months, as it eventually did in 2016. Unlike many commodities, it is sentiment - rather than supply and demand - with which we should begin our examination.
Meta-volatility
With good reason, many investors view gold as a useful proxy for - as well as a hedge against - market volatility. High prices often mean nerves about the future; low ones signal that earnings can reliably be found elsewhere. Three good examples of the former can be found in just the past decade. The first came in August 2007, when BNP Paribas fired the starting pistol on the banking crisis by suspending trading in its US mortgage debt-focused hedge funds. The second arrived four years later, when it became apparent that matters had mutated into a Europe-centred sovereign debt crisis. A third example appeared last June, when Britain's EU referendum removed the guarantee of the prevailing economic and political consensus - and cast doubts over the entire discipline of psephology. In each case, there were sudden, double-digit spikes in the gold price.
The gold price currently sits at $1,253 (£996), up from the $1,150 mark at the beginning of the year. Over that period, we have learnt some interesting things about markets' recent attitudes to gold. Firstly, we have seen further doubts over the long-established link between higher US interest rates and lower gold prices. This was thrown into sharp relief a fortnight ago, when the Federal Reserve lifted the short-term borrowing rate by 25 basis points to a range of 0.75 to 1 per cent, and reiterated its forecast for two further hikes in 2017. Undaunted, gold jumped 4 per cent.
Just as gold is a proxy for broader market volatility, it appears that gold traders have recently become more relaxed about a higher price and gold's direction of travel. Just as indices such as the VIX measure the implied volatility of the stock market, options market data can be used to calculate the expected volatility of the gold price - an index less memorably known as the GVX. As the graph below shows, this gauge of fear has been steadily falling since the beginning of the year, even accounting for the uncertainty of March's interest rate move. In 2017, it would seem that the price of gold, like the metal itself, is becoming increasingly inert.
Politics, the Fed and inflation
This picture seems unlikely to hold. For one, 2017 looks likely to be a continuing source of binary, knife-edge political decisions - such as the French presidential elections and Turkey's referendum on executive powers - which could cause big near-term movements in gold. Then again, it's not altogether clear whether such events are the dominant drivers of prices.
"After [the vote for] Brexit, there was the sharp increase in the gold price, but successive shocks since then have tended to have had a lower impact on price and demand," says Nitesh Shah, a commodity strategist and economist at ETF Securities. "When Trump arrived there was very little impact demand on gold - really measured in hours, not days or weeks; the Italian referendum almost had no impact on gold prices."
Of greater potential import, Mr Shah argues, is the play between interest rates and US inflation, which has already crept up from 1.7 per cent to 2.7 per cent since the US presidential election. "Real interest rates tend to move lower in the US, so even with two more Fed hikes in the course of this year that may not be enough to hold back inflation, which could be quite positive for gold prices." ETF Securities sees a troy ounce potentially hitting $1,300 by the middle of this year - a view apparently shared by the firm's clients, who piled into gold exchange traded products following the dovish Fed hike.
The impact on gold stocks
So where does this leave gold stocks? The first, somewhat obvious, observation is that all gold miners should have sufficiently trimmed enough fat in the past few years for $1,200 an ounce to be reasonably profitable. Of course, that is also predicated on keeping a lid on costs, which have been helped in recent years by a very strong dollar. As Polymetal International (POLY), Randgold Resources (RRS) and Hochschild Mining (HOC) have already flagged, dollar-denominated costs are likely to be higher in 2017, in part due to higher locally-denominated overheads relative to a weakened greenback. Still, the sharp improvements in cash generation seen in 2016 have left most if not all miners with stronger balance sheets, better dividend prospects and greater room for expansion.
Favourites
We were big fans of Egypt-focused Centamin (CEY) heading into this year, but we did not expect the conviction to be rewarded with the supersize dividend that headlined full-year results for 2016. Even accounting for the share price appreciation in recent weeks, the $178m full-year return to shareholders still translates into a 7 per cent annual yield. The chances of a similar return for 2017 also bode well, given the recent track record of overdelivering on cost-cutting and production guidance, although a well-signalled 14 per cent rise in all-in sustaining costs to $790 an ounce this year - as well as the one project risk - perhaps explain the shares' low price/earnings multiple.
Outsiders
Right up until it was hit by the Tanzanian government's decision to ban the export of gold concentrates, Acacia Mining (ACA) was the best performer in the sector. Many of those gains were immediately undone by the directive, which was introduced to encourage miners to move all smelting and processing operations to Tanzania, and boost domestic skills, employment and revenues. Last week, Acacia reported that a concerted effort to engage with the government had failed to reverse the ban, which affects the Bulyanhulu and Buzwagi mines and is costing the miner around $1m in lost revenues each day. It has also resulted in the loss of the premium applied to the company's mooted tie-up with Canada's Endeavour Mining (TSX: EDV), which now seems unlikely. But with sufficient capacity to store concentrate on site beyond April, Acacia might have a shot at regaining some of its lost ground.
IC VIEW
In a recent article for the World Gold Council (unsurprisingly, pro-gold) newsletter, former Federal Reserve chairman Alan Greenspan wrote that he views gold as both "the primary global currency" and "insurance". Increases in inflation will "ultimately increase the price of gold”, he added. "It's not for short-term gain, but for long-term protection." This is a stance we have long held, albeit complicated by the need to cover the vagaries of the businesses that actually mine the stuff. That said, there are clearly encouraging signs for gold this year; namely US inflation and the increasing disconnect with higher interest rates. Our view, reinforced by the recent results season, is that gold equities that offer a decent yield are the best way of making the most from the sector's good times.
