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Gold: “comes in from the cold”

Recent equity market volatility has helped gold overcome its reputational issues. The yellow metal peaked at just over $1900 / oz in September 2011 but has spent most of the last four years between $1050-$1300 / oz. Recent gold buying is a function of:-

A) Heightened global equity and currency market volatility

B) Reduced expectations for Federal Reserve rate hikes over 2016

C) Increased perception of US/UK political risks over 2016 necessitating a liquid global asset denominated in USD and benefiting from “safe haven” status (albeit with a tarnished reputation)

What precisely has changed?

According to World Gold Council (Link) data gold demand in Q4 2015 rose 4% to 1,117 tonnes. This suggests improving supply/ demand fundamentals.

Supply of the yellow metal:-

A) Annual gold mine production up 1% (its slowest rate since 2008) whilst recycling activity dropped to multi-year lows during the 2012-15 down cycle.

Demand for the yellow metal:-

A) Consumer demand remained resilient over Q4 (US +6%, India +6%, China +3%, East Asia +5%) balanced out lower demand from EU -7%, Middle East -18% and Russia -26%.

B) Overall as World Gold Council 2015 data shows, the commodit demand was resilient and almost unchanged (-0.3%) suggesting buyers kept buying and were incentivised by the lower average price (-$106.30 / oz) over 2015.

Gold - As an alternative?

 

 

 

 

 

 

 

 

 

 

 

 

Source; World-Gold Council

Chronic product oversupply/ dependence on China is a key factor for base metals. But this is not the case for gold (supply +1%/ demand -0.3%) over 2015. In 2016 we expect demand growth to continue the Q4 trend and outstrip supply growth.

Read the full research report here for two gold focused stocks that Ravi is watching.

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