Gold had a rather benign week, trading modestly stronger in the first half of the week on the back of soft general equity markets, but then retreating to close on the lows of the week as equity markets found some strength.
Next week all eyes will be on the US nonfarm payrolls on Friday where a stronger than consensus number would likely be a headwind for gold. Investment demand for gold showed an uptrend in the last week with holdings added both to the gold ETFs and the speculative net length in gold futures.
One of the notable features of the 2016 reporting season was the struggle of many larger gold producers to replace the ounces they mined during the year with new reserves. This is a reflection of the multi-year downturn in exploration spend by many companies and the challenge in finding economically viable new deposits. This trend is likely in our view to result in a meaningful increase in exploration spend by gold companies (which was seen in the comments by some companies in their 2017 guidance) and also a pick-up in corporate activity as companies look to either form JVs for undeveloped projects or acquire them outright. Evidence of this was seen during the week as Goldcorp announced they would be earning in to a newly formed JV with Barrick on the Cerro Casale project in Chile.
Source: DataStream, data to 30th March 2017
The chart above shows that in more recent periods, the gold shares are exhibiting a higher beta to moves in the gold price.
We expect a range-bound gold price environment for the remainder of 2017 as we see both headwinds and tailwinds. We are optimistic on the outlook for global economic growth which typically leads to positive performance from equity markets, with which, there is less need for a diversifier. With the US on a tightening cycle and monetary policy elsewhere loose, the prospects for the US dollar remain relatively robust which could act as a headwind. However, political uncertainty remains heightened given events such as: Brexit, the new US administration and unrest in the Eurozone and this is not being reflected in financial markets in our view. After an extraordinary bull run for global equity markets, which appears to have been fuelled by unprecedented monetary policy, we continue to believe an allocation to gold makes sense as a source of portfolio insurance. Over the longer-term, we expect the gold price to be supported by increased Asian retail demand driven by improving incomes. We also expect a moderate decline in the mined production of gold over the next five years due to the underinvestment of companies in recent years and the lack of new discoveries. We expect gold equity performance to remain highly sensitive to moves in the gold price and see them delivering a beta of around two over the next 12 to 18 months.