Performance Tables (all figures in U.S.$, source DataStream)
Gold markets performed poorly this week as the market continues to react considerably more positively to Trump presidential win than expected as it focuses on potential stimulus leading to growth. However, we continue to think over time a deficit funded trillion-dollar stimulus package should result in much higher inflation and lower real rates, which should be supportive of gold.
In addition, another head wind from gold came from Yellen's comments which eluded to the almost certain possibility of a rate hike in December. This has been one of the drivers of dollar strength in recent days with the DXY index, which means the average exchange rates between the U.S. dollar and other major world currencies, making 13 year highs.
Financial investors have moved away from gold with 1.5mil ounces out of ETF holdings in the past week.
On the positive side, last Tuesday the Indian government decided to immediately withdraw the Rs500 and Rs1,000 notes that account for 85% of notes in circulation. ATM's were closed for 48 hours after the announcement. The move is part of the government's plan to tackle corruption and tax evasion. This could be a big positive for physical gold demand as Indians lose confidence in their fiat currency. However there has been rumour of a ban on gold imports by the Indian government until the end of the current tax year in March, and any large gold purchases are having increased regulation such as presenting their tax codes.
Political uncertainty has a potential to become a theme again in Europe with the Italian constitutional referendum on 4th December, polls have widened against Renzi who has publicly said he would step down in the event of a no vote. This could be a significant positive catalyst for gold as, unlike Trump winning, it throws up much uncertainty in Italy and the wider Eurozone. In the next week FOMC Minutes & Durable Goods may be a catalyst for gold. If we see Durable goods to pick up, we could see gold come under some pressure.
Gold & Gold Shares
Source: DataStream, data to 17th November 2016
The chart above shows that in more recent periods, gold shares are exhibiting a higher beta to moves in the gold price.
Gold has proven its worth this year as a source of portfolio insurance and diversification. Global uncertainty remains at heightened levels, and with 85% of GDP in Europe voting over the next two years, gold's safe haven qualities have been elevated in our view. The outlook for U.S. rates has now changed dramatically as the consensus view of several rate hikes in 2016, which we saw at the beginning of the year, has now been reduced to one. Gold no longer has a meaningful opportunity cost associated with holding it in comparison to other safe haven assets as many of these (e.g. government bonds) have low or even negative yields.
We expect the performance of gold equities to remain highly sensitive to the performance of gold bullion, however, and the improved capital discipline and operational efficiency seen in a number of companies to continue to help rebuild investor trust.
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