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Weekly Gold Report

07-Aug-2017
By BlackRock

Gold posted a third consecutive week of gains, rising +0.8% to finish at $1,269/oz. (a seven-week high).

Performance Table

(all figures in US$)

Weekly Gold Report

Source: DataStream

Summary

Gold posted a third consecutive week of gains, rising +0.8% to finish at $1,269/oz. (a seven-week high). Gold was supported by the US dollar weakening further, with the DXY (an index that tracks the US dollar’s strength relative to other currencies) at 92.73 having been at 102.78 at the start of the year. Geopolitical tensions remained elevated as Anthony Scaramucci announced he was stepping down from the US administration, becoming the shortest-serving White House communications director in history, whilst North Korea launched its second intercontinental ballistic missile test. Net speculative length in the gold futures market increased by 2.9Moz to 10.3Moz. However, this went against the trajectory we have seen so far this year, as net speculative length has been falling. It’s rare to see the gold price increasing whilst net length is declining, as has been the pattern this year, and tends to be a bullish signal as there isn’t the potential headwind of long positions unwinding.

Inflows into gold ETFs this year were highlighted in the World Gold Council’s Q2 Quarterly Demand Trends report which was published during the week. Gold ETFs recorded net inflows of 168 tonnes in H1 2017 and whilst this evidences investors still turning to gold as a ‘safe-haven’, this represents a -66% decline from the spectacular flows we saw last year. Other notable points from the report included central bank purchases of 94.5 tonnes in Q2 and whilst down year-on-year, importantly they are still net buyers. Bar and coin investment was stronger year-on-year as was jewellery demand. Indian jewellery demand was particularly strong owing to buying ahead of the new Good and Services Tax (GST), which came into effect on the 1st of July. It remains too early to say how Indian demand is being impacted with the new tax now in place.

Turning to the gold equities, there were a slew of end Q2 results reported during the week and in general these were a good set of results with the majority of companies beating on earnings estimates and reporting strong operational results. Encouragingly, for now, most gold companies still seem averse to reverting back to the poor capital discipline of the past.

Gold & Gold Shares

Gold chart

Source: DataStream, data to 3rd July 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 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. Other variables to consider include the US dollar, the outlook for which is relatively robust, given the US is on a tightening cycle and monetary policy elsewhere is loose; the gold price and the US dollar typically exhibit a negative correlation. 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. We expect gold shares to continue delivering the beta to the gold price that investors look for.