Weekly gold report

mar 6, 2017
por BlackRock

It was a tougher week for gold as the U.S. dollar modestly strengthened (the DXY index broke back above 102 briefly) and the S&P 500 broke to a new all-time high.

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

Weekly Gold Report

Source: DataStream

Summary

It was a tougher week for gold as the U.S. dollar modestly strengthened (the DXY index broke back above 102 briefly) and on Wednesday the S&P 500 broke to a new all-time high, indicating that there is still strong appetite for risk assets. Volatility also remains very low with the VIX Index (the volatility of options on the S&P 500) closing the week at below 12. Donal Trump’s speech was also more conciliatory than some observers had been expecting so the appetite for assets such as gold (that typically provide a hedge against volatility or a sell-off in risk assets) waned and the probability of a Fed rate hike in March jumped to over 80%. The gold equities reacted very violently to the modest move down in gold, falling by over 8%.

One of the key themes from the earnings season for gold companies was that many of them struggled to replace / replenish the reserves they mined out during the year. This supports our view that exploration spending will have to rise in the next few years and that high quality projects that sit in junior or mid-tier companies will become increasingly sought after.

Gold & Gold Shares

Gold chart

Source: DataStream, data to 2nd March 2017

The chart above shows that in more recent periods, gold shares are exhibiting a higher beta to moves in the gold price.

Outlook

Despite coming under pressure in Q4 2016, gold and gold equities were up significantly last year and have proven their worth as a diversifier and source of portfolio insurance. Political uncertainty remains high given unrest in the Eurozone and the controversial Brexit and U.S. election results. This, in combination with the increasing need for portfolio diversification as global markets are currently positively correlated highlights, in our view, the importance of an allocation to gold/gold equities. The opportunity cost of holding gold has also been reduced as other safe-haven assets are now trading with very low or even negative yields.

Should we see a more aggressive than expected path for U.S. interest rates in 2017, global economic growth exceeding expectations and financial markets performing well, the gold price would likely come under pressure. However, in our view, any losses incurred from an allocation to gold equities in that scenario would likely be offset by strong performance from the rest of an investor’s portfolio.

Over the longer term, future supply of physical gold is likely to be constrained as ore body discoveries are becoming increasingly scarce. This is an important supply side factor in the market, and could contribute to higher prices for gold in years to come.