Gold Price: Unappreciated or Appreciated

  • Dec 13, 2019 AEDT
  • Team Kalkine
Gold Price: Unappreciated or Appreciated

Gold price increased by 30.98% from August 2018 USD 1180.4/Ounce to a maximum of USD 1546.1/Ounce in September 2019 and presently hovering around USD 1463.8/Ounce as of December 12, 2019 as shown in figure 1.

Figure 1: Gold Prices in USD/Ounce

Source: World Gold Council

The sharp rise in prices is due largely on back of the following global macro events: -

  • Trade war between US and China: The tension between the US and China has been unfolding and the trade war has created uncertainty in the markets. US President indicated loss of trillions of dollars in trade with China and asked companies to look for other In retaliation, China imposed a new tariff on USD 75 Billion US goods beginning September.
  • US Federal Reserves: The enduring US-China trade has led the market to anticipate further cut in US Federal Reserve interest rate in continuation with July 31, 2019, by 25 basis points to 2-2.25% because of muted inflation pressures and vocal support for further quantitative easing by the US President.
  • International Monetary fund: The IMF warned that the economic growth might slow further with weakened investment and disruption in trade due to US-China trade war and exit of Britain from the European Union. This slowdown has pushed the investment toward gold exchange trade fund across the globe. Weaker monetary policy in India, pulls down bond yield lower, making non-yield gold more alluring.
  • Global Central Banks: Purchase of gold by global banks has complimented the surge in price. According to the World Gold Council, the amount of gold purchased by central banks has increased by 57.14% from 238 tons in H1 2018 to 374 tons in H1 2019. The slowdown in the global economy has led to the shift from interest in the equity investment to the safer assets like bond and golds.

Apart from central banks, there exist more diverse demand for gold across consumers and investors such as Technology demand, Jewellery demand and investment demands. In the milieu of which it is quintessential to analyze this impact on gold prices as shown below: -

Technology demand is very negligible to have any impact on gold prices. Also, on the contrary, the price of gold can affect technology demand, as it is price-taker and not price setter.

Jewellery demand can have a significant impact on the gold price. The maximum demand in gold comes from China and India. The surging gold prices, and subdued economies have had a major impact on the gold jewellery demand, the Q3 jewellery demand fell by 16% to 460.9t, lowest levels in the past 9 years. US demand witnessed a 11th consecutive uptick in Q3.

Gold Investment is done in two ways, either via Physical Investment, i.e. directly holding the gold coin and bar and Exchange Traded Fund (ETF), i.e. indirectly holding funds backed by gold. In this fund manager or custodian invest in hard gold assets. The demand for ETF is more than the physical investment because of calculative risk and easiness to liquidate than the physical gold.

Also, the increase in the price of gold has dwindled the demand of gold in Q3’2019 but compensated by the surge in ETF inflows in the same quarter. Jewellery demand was hampered by 16% seeing the expected fall in price after economic recovery. Similarly, the decline in bar and coin was 50% followed by a 4% drop in technology. This fall in demand was compensated by ETF inflows of 258t in Q3’2019.

Supply

Source: World Gold Council

The gold supply has reached the highest level of the past two years in the past quarter. The high gold prices have motivated the miners to supply more to the continuously increasing demand.

Recycled Gold: With the highest growth of 10.3% observed in the recycled gold in Q3,2019 and saw the highest level since Q1, 2016. The recycled gold volume increased to 353.7 tonnes. The gold price rally has encouraged the consumers to sell back their holdings for profits resulting in increased supply even though the mine production is quite stagnant. With US-China Trade war likely to extend till the 2020 US presidential elections, the price rally is set to continue till for the upcoming year. This would result in even increased gold supply from the recycled portion.

Mine Production: The mine production decreased by 0.6% to 877.8 tonnes in Q3,2019 as compared to previous corresponding period. The revamping of large-scale mines such as Cadia valley, Natalaka have increased production, but falling head grades and emergency shutdowns in other operations such as Boddington, Superpit and Syama underground have offset the impacts. The output from China continued to decline, mostly due to environmental reforms which were introduced in 2017. Grasberg, which is transitioning from open pit to underground operations, dragged down the production of Indonesia. The gold mining industry has been experiencing a consolidation phase with Barrick-Randgold and Newmont-Goldcorp mergers, two of the biggest companies in the sector. The increase in gold prices has pumped up new energy among miners to invest in new projects such as Mcphillarnys gold mine.

Future Prospects

Gold prices reached a six-year high of US $1,547 on 3 September 2019. With the glut in iron ore and coal supply, gold’s will continue to provide a haven to its investors. The demand from Jewellery, mainly dominated by China and India, would be closely watched as the prices are currently unattractive.

Source: Resources & Energy Quarterly, September 2019

The surging demand from central banks is likely to continue as long as gold continues to provide security against price drops and fluctuations in the commodity, geopolitical issues and trade war. The gold price would increase further due to trade tensions, rising geopolitical conditions and the volatility in the bulk commodity markets.

The gold prices are currently in a correction phase and the battle between the bulls and bears is unfolding. On the fundamental front, the uncertainty over the US-China trade war is largely looming unsettled and the upcoming global elections are adding more uncertainty. The prices have reached year highs, making it unattractive for the jewellery demand, on the other side the unabating quantitative easing by the central banks is adding more liquidity to the gold demand.


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