Join our community of smart investors
OPINION

Can gold stocks keep their momentum as Fed wavers?

Can gold stocks keep their momentum as Fed wavers?
February 15, 2016
Can gold stocks keep their momentum as Fed wavers?

As the charts below clearly show, that's done wonders for the share prices of the major gold miners in London. Leading the charge is Pan African Resources (PAF), up a whopping 72 per cent this year, thanks to not only a climb in spot prices, but an upgrade to production forecasts and depreciation of both the rand and sterling against the dollar. Investors hoping that an increase in the price of gold will lead to even higher profit margin gains among the metal's miners this year also helped to boost shares in Acacia (ACA), Randgold Resources (RRS) and Highland Gold (HGM), all up at least a fifth in February so far.

 

 

Given global demand for gold has fallen for four straight years, it is sensible to question whether the recent uptick represents a blip caused by recent financial turmoil, or if it could really signal the return to a golden bull market.

 

Look to the buyers

The World Gold Council (WGC), which has a mandate to talk up its own book, recently put forward a good case for the former. In its 2016 outlook, the lobby group thinks markets are making a break with a US-centric view of gold, which has weighed on prices since 2014 thanks to expectations of interest rate rises. The WGC also points to the fact that the vast majority of physical demand for gold comes from non-dollar buyers outside the US.

Furthermore, the group argues that interest rates are not the dominant driver of the gold price, once the effect of the dollar is taken into account. That's important, because the dollar is already looking pretty strong, and could act as a “de-facto tightening mechanism, thus preventing the Fed from moving interest rates too far too soon”.

 

 

Recent movement in the price of gold could give some credence to that. As the chart below indicates, the immediate reaction to recent Federal Reserve announcements (shown by the three small markers) is a dent in the gold price. But Janet Yellen's decision to leave interest rates unchanged on 27 January, referencing recent turmoil in financial markets, appears to have sowed the seeds of concern which sent gold skyward.

 

 

Therefore, if markets continue to worry about the direction of monetary policy - and given mounting speculation that the Fed will rise rates much more slowly than expected or even reverse its December hike, that looks likely - gold could be subject to further net inflows.

Throw in a leap in physical demand in India and China, which we flagged in December, and the rally could well have further to run.