Gold: rally continues while other sectors falter
The many readers who have been following the recent rise in the price of gold must be a happy bunch.
After hitting a high of US$1,950 an ounce in January 2021, there was a long downtrend trend in the price. Not counting the sudden dip and recovery in early March, gold finally established an upward trend. As of May 31, the bid for gold was US$1,907 an ounce.
The recent positive gold price action is attributed to inflation concerns, extreme volatility of cryptos, the lower U.S. Dollar, 10-year U.S. Treasury Bonds and rising world geopolitical tensions with maybe the worse yet to come.
Speaking of 10-year Treasuries, the yield of 1.61% is down from the long term average of 4.37%. With the annual inflation rate for the United States being 2.6% for the 12 months ended March 2021, I fail to see why investors would buy them knowing they will lose over 1% in the end. I can only speculate that they were purchased for their security.
Some analysts are of the view that the enormous debt of the U.S. and possible increasing inflation could also drive gold prices higher as well as China’s recent approval of allowing huge imports of gold. Meanwhile, Federal Reserve Chair Jerome Powell said that its monetary policy will remain unchanged and downplayed rising inflation fears.
Another development has been the huge consumer interest in gold (and silver) products from various mints. Both the Royal Canadian Mint and the U.S. Mint report almost selling out of certain coins and bars. Will that affect the price of gold?
In its latest report reviewing Q1 2021, the World Gold Council stated, “While the average gold price in Q1 was 13% higher y-o-y, it declined by 4% q-o-q. The opportunity to buy at lower prices, relative to the highs seen last year, boosted consumer demand, particularly as many markets continued to emerge from lockdown and economic recovery lifted sentiment.”
For example, bar and coin investment of 339.5 tonnes (+36% y-o-y) was buoyed by bargain-hunting, as well as by expectations of building inflationary pressures, according to the WGC report.
It’s amazing how many people are buying jewellery during the COVID-19 pandemic. The WGC report noted that jewellery demand of 477.4 tonnes was 52% higher y-o-y. The value of jewellery spending – US$27.5 billion – was the highest for a first quarter since Q1 2013.
According to the World Gold Council, growth in consumer demand was offset by strong outflows from gold-backed ETFs (gold ETFs), which lost 177.9 tonnes in Q1 as higher interest rates and a downward price trend weighed on investor sentiment.
Q1 2021 also saw continued healthy levels of net buying by central banks: global official gold reserves grew by 95.5 tonnes, 23% lower y-o-y, but 20% higher q-o-q.
Gold used in technology grew 11% y-o-y in Q1 as consumer confidence continued to recover. Demand of 81.2 tonnes was just above the five-year quarterly average of 80.9 tonnes.
Another factor that could impact the gold price and that is world governments taking steps to control digital currencies. Crypto currencies have been a competitor for investor dollars and some people have made big money on paper. Others have not done so well. However, some investors are expecting digital currency disruptions will drive investors away from cryptos and into gold sector investments. Maybe it has started. On May 19, Bitcoin fell 30% to US$30,000 from $71,000, its worst one-day loss since March 2020 and has shown volatility since. These huge swings in the value of Bitcoin are much more than volatility in the price of gold. Meanwhile, some countries such as Turkey are banning cryptocurrencies.
To top it off, there is the mass psychology angle or “herd mentality”. There is nothing like investor enthusiasm to drive prices upward – and, of course, that includes gold stocks.
At the current gold price, gold producers can generate good cash flow and numerous gold exploration projects look attractive. While no one knows the future and there are always levels of resistance, these are encouraging bullish signs for gold to continue to perform.
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