For qualified investors

Monthly Gold Report

14-Sep-2017
By BlackRock

The gold price increased by +3.7% over the month to finish at a one-year high of $1,337/oz, with heightened geopolitical uncertainty acting as a tailwind.

Performance Table

(all figures in US$)

Weekly Gold Report

Source: DataStream

Summary

The gold price increased by +3.7% over the month to finish at a one-year high of $1,337/oz. Heightened geopolitical uncertainty was a tailwind for gold as tensions escalated between the US and North Korea after North Korea carried out further missile tests, with a missile fired over Japan. This appeared to contribute towards increased 'safe-haven' buying for gold, with gold ETFs recording net inflows of 40 tonnes over the month. Meanwhile, net length increased from 90.8 thousand contracts to a relatively elevated position of 208.4 thousand contracts, representing a potential future headwind should we see this unwind. US economic data was generally positive, with the US's official Q2 GDP growth figure revised up from 2.6% to 3.0%. The US dollar continued on the downward trajectory we have seen this year, however, which buoyed the gold price, with the DXY (a US dollar index) falling from 93.0 to 92.8, the lowest level since January 2015. We also continued to see a tight inverse relationship between gold and the US 5-year real interest rate, which was a tailwind as the latter declined from 0.16% to 0.06%. Meanwhile, broader equity markets were resilient, with the MSCI World Index flat over the month.

Turning to the equities, the FTSE Gold Mines Index returned +7.4% over the month, exhibiting a strong beta to the strengthening gold price, which has lacked at times this year. Interestingly, in general, larger cap gold companies continued to outperform smaller cap gold names, evidenced by the GDX (a gold equity ETF continuing to outperform the GDXJ, its junior equivalent). This is particularly unusual to see in a rising gold price environment and for reference, year-to-date to end August, the GDX is now up +17.8% versus the GDXJ up +13.2%.

Gold chart

Source: DataStream, data to 7thSeptember 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.