Gold has been one of the best performing assets of 2016 and is up 15% since 1 January. Gold bugs around the world have been calling this the start of a furious bull market in gold and silver. Today I’m looking at the reasons gold has made this move and whether it will continue.
Weak dollar and low rates for longer
After the Federal Reserve increased US interest rates in December last year, most of us were expecting multiple rate rises this year. However this hasn’t happened and the Fed has been surprisingly dovish, which has weakened the dollar. The US Dollar index tracks the dollar against a basket of currencies and is down nearly 4% this year. This has led to gold being in demand with investors due to the weak dollar making it cheaper for investors to buy it as it’s sold in US dollars. The Fed look like it will raise rates some time during this summer, but it’s likely to be a small increase again and unlikely to cause a major shift in the gold market.
Global economic headwinds
This year, global markets have been struggling to advance due to weak economic data around the world. Q1 started with huge uncertainty over a Chinese ‘hard landing’ along with weak US GDP data and with ongoing Greek issues and Brexit uncertainty, it’s no surprise that gold is still in demand. Inflows into bullion-backed exchange-traded funds are at the highest rate since early 2009 as investors look for a safe haven for capital. Investment demand for gold is up 122% year-on-year, according to the World Gold Council, and Central Banks remain the largest buyers of gold.
Indian and Chinese demand
The World Gold Council has stated that it believes Indian gold demand could grow up to 10% this year despite falling heavily in Q1. Two-thirds of gold demand comes from villages where it’s seen as an investment, so as we look towards monsoon season we could see a surge in demand if the rains are good. General consumer demand in China was also down in Q1 due to the slowing economy, but investment in gold was up over 5% in the quarter. Across India and China, demand hasn’t been particularly strong this year but we still find the gold price well up since 1 January. If demand in these powerhouse countries does pick up then it may push the gold price even higher.
How to play the gold price
The most obvious way to play the gold price is to buy bullion-backed exchange-traded funds that directly track the gold price. There are also ways to directly buy gold in bars or coins but this does require more effort and obviously isn’t as liquid as an exchange-traded fund. The final way to play the gold price is by buying shares in gold mining companies, which is more risky but offers more reward. Producing gold miners often outperform the gold price by multiples, so for investors with a bigger risk appetite then equity may be the way forward.