Weekly gold report

nov 21, 2016 / por BlackRock

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.

Performance Tables (all figures in U.S.$, source DataStream)

Weekly Gold Report

Source: DataStream

Summary

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

Gold chart

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.

Outlook

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.

Source: DataStream. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. BlackRock's gold- and commodity-related funds do not hold physical gold or other commodities. In some less developed stock markets there are risks from political, economic and market factors which are of particular significance. These include the possibility of various forms of punitive or confiscatory government intervention together with reduced levels of regulation, higher brokerage and transaction commissions, less reliable settlement and custody practices, loss of registration of securities, lower market liquidity, higher market volatility (causing a substantial increase in price and currency risks) and less reliable financial reporting. There is a low level of correlation between the mining sector and equities generally, with gold bullion and mining shares tending to be counter-cyclical in nature. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons. If you do not wish to receive these communications in future, please e-mail us at broker.services@blackrock.com or telephone us on 08457 405 405.