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Weekly Gold Report

19-Jun-2017
By BlackRock

It was a tough week for gold with the yellow metal closing down almost 2% at $1,255/oz.

Performance Tables (all figures in US$, source DataStream)

Weekly Gold Report

Source: DataStream

Summary

It was a tough week for gold with the yellow metal closing down almost 2% at $1,255/oz. Although it was initially buoyed on Wednesday with the release of some worse than expected US economic data, it gave back all of these gains and more later the same day on the Fed announcement. Although the 25bps increase in the Fed Funds Target Rate had been widely expected, Yellen gave a more hawkish commentary about the timing and conditions for the Fed to begin shrinking its balance sheet and this resulted in the US dollar strengthening and the gold price weakening.

The gold equities reacted negatively to the move down in the gold price but there was some additional news that pressured the South African focused gold stocks. The new Mining Charter was announced on Thursday in South Africa – the original charter was published in 2002 and amended in 2010. The new updates were taken negatively by the market because they require not only an increase in BEE ownership in companies but also requires a large percentage of goods and services consumed by companies are acquired from BEE entities – something that, in the short to medium term at least, is likely to decrease the operating efficiencies of South African gold mining companies.

Gold & Gold Shares

Gold chart

Source: DataStream, data to 15th June 2017

The chart above shows that in more recent periods, the 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.