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Monthly Gold Report

16-Okt-2017
By BlackRock

September Report

The gold price weakened during September, falling by -2.5% to finish the month at a price of $1,284/oz.

Performance Table

(all figures in US$)

Weekly Gold Report

Source: DataStream

Summary

The gold price weakened during September, falling by -2.5% to finish the month at a price of $1,284/oz. This weakness was driven by the calming of concerns around North Korea and modest strengthening of the US dollar. Positive economic data from the US acted as a headwind- US manufacturing activity hit a 13 year high in September amid strong gains in new orders and raw material prices, with the Institute for Supply Management (ISM) releasing a reading of 60.8 for September, the highest since May 2004. This data pointed to underlying strength in the economy, and fuelled expectations for optimism on U.S. economic growth. The US dollar also improved, which supressed the gold price, with the DXY (a US dollar index) increasing from 92.8 to 93.1. Broader equity markets were also positive with the MSCI World Index delivering +2.1% over the month.

Looking at Gold ETFs, net inflows of 54 tonnes were recorded, resulting in total holdings of approximately 2,157 tonnes at the end of the month. Meanwhile, the Comex speculative position was down 57 tonnes, decreasing to 661 tonnes in September compared to 719 tonnes in August.

Elsewhere in the precious metals space, palladium achieved price parity with platinum for the first time in sixteen years; they are often mined together as co-products. Platinum is used in auto catalysts to reduce harmful fumes from diesel cars, whilst palladium is used in gasoline cars. Since the VW scandal in Europe, highlighting that VW had been allegedly manipulating the results of its diesel emissions tests, sales of diesel cars have declined and platinum demand has been impacted. For reference, the price of platinum has increased by 2.5% year-to-date but palladium has increased by 39.6% over the same period.

Gold chart

Source: DataStream, data to 5thOctober 2017

The chart above shows that in more recent periods, gold shares are exhibiting a higher beta to moves in the gold price.

Outlook

We expect to see a relatively range-bound gold price environment over the next 12-18 months but with upside surprise risk. Global economic growth appears to be improving which is likely to be supportive for broader equity markets and could act as a headwind for gold. However, we see a lot of uncertainty today, given events such as Brexit, the new US administration and unrest in the Eurozone, and this doesn't appear to be being priced into financial markets today. With broader equity markets at all-time highs after an extraordinary bull-run that has appeared to have been fuelled by monetary policy, we continue to believe in the importance of an allocation to gold equities.

Over the longer-term, we expect the general trend of the gold price to be an upwards one as rising incomes in emerging markets support retail demand and the absence of new, large gold discoveries constrains supply. Gold equities are trading at attractive free cash flow multiples today as strength in the gold price has coincided with the companies having made strong progress in terms of improving their balance sheets and reducing costs.