Why dragon like cravings for gold won't shift Gold price, via Bloomberg
I came across this article recently on Bloomberg citing that despite central banks around the globe buying large amounts of gold it is unlikely to impact prices. I wrote an article on the growth in China's Gold holding back in early April,see here.At the time my instinct was that, despite all the gold buying, there needed to be a fundamental reason for gold to appreciate. Equities have been rising and currencies stabilising has meant that the safe haven demand of Gold has had less of an attraction. At the end of the day you don't get any benefit from holding Gold aside from Gold's intrinsic value, so it would not be an instrument of choice if you can get some relatively stable yield from your investment elsewhere.
Funds moving into Gold shorts
Money managers of large funds are now moving to the short side in Gold and investors are selling their exchange traded funds holdings. So, here is the battle:
- Sovereign buying on the one hand. This has been to the tune of 700 tons of bullion in the past year according to the World Gold Council. In Q4 2018 gold demand gained 4% on the highest central bank buying in 50 years. That's a lot of Gold.
- Hedge funds now going net short on Gold. The Fed's staying at neutral will add more bearish pressure to Gold. Remember, that the general rule of thumb is that Gold and the USD have an inverse relationship. See here.
The World Gold Council on drivers for Gold
The World Gold Council have written an interesting piece on their gold projection for 2019, and it all hinges on the USD position. They recognise four drivers of Gold prices as follows:
- Economic expansion: periods of growth are very supportive of jewellery, technology and long-term savings
- Risk and uncertainty: market downturns often boost investment demand for gold as a safe haven
- Opportunity cost: the price of competing assets such as bonds (through interest rates), currencies - especially the US dollar - and others, influences investor attitudes toward gold
- Momentum: capital flows, positioning and price trends can ignite or dampen gold's performance.
Well worth checking out the whole article here.
All eyes will be on the NFP now to see if the Fed's neutral stance is justified. A strong number and Gold will be pressured further.