Gold is back in vogue with investors, but the question is, does this rally have legs?

Gold has returned in vogue as investors seek out a secure haven amid growing global volatility.

The real question is whether this gold rally may have legs, or whether or not this will fizzle out like numerous others over the past couple of years.

The precious metal is incorporated in the midst of the tremendous upward move, jumping 18 percent since the oncoming of 2016. The important thing gold futures contract rose with a whopping US$53.20 an oz on Thursday alone, bringing it to US$1,247.80. Gold’s performance this year is the polar opposite of most other commodities, that are down sharply.

Gold’s surge may come as global equities tumbled right into a bear market. On Thursday, stock indexes worldwide fell on fears within the health from the global economy and banking sector, with MSCI’s world stock index dropping to a lot more than 20 percent below its peak, while safe-haven 10-year Treasury yields hit their lowest since 2012.

Several factors will work in gold’s favour: Along with wobbling financial markets, central bank gold buying is on the rise and the U.S. dollar is weakening as investors are increasingly doubtful that the Fed will raise interest rates just as much or as quickly as previously assumed. Those doubts gained steam after chairman Janet Yellen’s remarks to Congress this week, by which she took a cautious tone on the economy.

Over the past few years, the consensus view from Goldman Sachs along with other Wall Street banks was that U.S. interest rate hikes were imminent and were poised to crush the gold price. That drove many generalist investors out of the market, and they are only starting to take an interest again.

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“The expectation that gold was going to be completely beaten up on the back of Fed rates of interest hikes appears like it’s not going to happen,” said Sean Boyd, leader of gold mining giant Agnico Eagle Mines Ltd. “People are saying they need some protection and are revisiting gold.”

Boyd asserted because the rate hike thesis became ingrained, traders massively shorted gold and overwhelmed any bullish signals on the market. That encouraged investors to dump their holdings. Now that the eye rate thesis is changing and investor sentiment has turned positive, he is hopeful that gold is poised for a sustained upturn.

Some of the gold fundamentals are clearly bullish. The World Gold Council reported on Thursday that overall gold demand grew four percent in the fourth quarter of 2015, while central bank demand jumped 25 %. Mine production dropped the very first time since 2008.

Investors happen to be buying gold aggressively to date this season through exchange-traded funds, which added near to 100 tonnes of gold as of Feb. 4. ETFs shed a staggering 880 tonnes in 2013, which drove prices down.

The bullion rally has provided an enormous boost to Canadian gold mining stocks, which were up overall on Thursday. Kinross Gold Corp.’s shares rose 14 per cent, Barrick Gold Corp.’s shares rose four per cent, and B2Gold Corp.’s shares jumped 14.5 percent.

Despite the recent gold euphoria, questions remain about the sustainability of this rally. Gold also moved higher in the first quarters of both 2014 and 2015, but tend to not keep that momentum for over a couple weeks. Many experts believe the same thing will happen now. Goldman Sachs, for just one, remains skeptical – this week, it predicted prices would drop to US$1,000 an ounce by the end of 2016.

But Martin Murenbeeld, chief economist at Dundee Capital Markets and a close follower from the gold market, believes this rally is different. He noted those prior two moves were associated with specific geopolitical events: Russia’s seizure of Crimea in 2014, and the Greek election in 2015.

“There’s no specific crisis today that you could say is pulling up gold, so that as soon because it dissipates that gold will come back off,” he said.

“What looks to be happening is the U.S. dollar is rolling over. When the dollar will roll over, gold is going to do much better.”

Financial Post

pkoven@nationalpost.com

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