Today will be a busy day for gold analysts. The two biggest London-based precious metals consultancies, Metals Focus and GFMS are both releasing their latest treatises on the global gold market and analysts will be poring over the plethora of data in the reports.
First off the blocks is Metals Focus with its 99-page Gold Focus 2016 report. At the time of writing the GFMS publication (in the event a marginally less heavy publication at 96 pages) was not set to be released for another hour. The two reports will be somewhat similar in content if not necessarily in their conclusions as both consultancies have similar roots with Metals Focus originally formed primarily by a breakaway group of former GFMS analysts.
The two consultancies’ views on where the gold price is likely to go in the medium term will thus be of particular interest. The teams of analysts who work on these reports are basically impartial without any specific axe to grind and while their predictions will largely be based on fundamentals – and it’s often arguable whether the gold price necessarily follows such in the short and medium term where easily swayable sentiment and extraneous geopolitical and geo-economic factors may impact. But even so their research and views are seen as significant in terms of the underlying situation.
In the event Metals Focus is definitely more bullish on the likely progress of the gold price than it has been for some time. In an accompanying press release, Metals Focus Director, Nikos Kavalis comments “changing expectations towards the outlook for US interest rates, concerns about monetary policy elsewhere, as well as turbulent equity and bond markets, have re-kindled institutional investor interest in the metal.” This has shown itself initially in the very positive performance of gold in the first quarter of the current year – the best early year performance since 2008, the consultancy notes. (That on its own may generate some warning bells – economic history does tend to repeat itself!) This in turn helped gold to rally by over 21% from end-2015 to a $1,285 peak in early March.
Kavalis then added the comment “this impressive recovery will mark the end of the bear cycle that started in late 2011. Further gains later in the year are forecast to see gold peak at $1,350 by end-2016, almost 30% higher than its December 2015 low.” This is a remarkably positive statement from a consultancy which is always extremely conservative in its overall projections. While not positive enough for the gold bulls out there – who are perhaps looking for even higher year-end levels – it does represent a very positive view from one of the sector’s mainstream consultancies.
Thus this expectation reflects Metals Focus’ belief that the change in investor sentiment seen in the first quarter is more likely to solidify than melt away in the months ahead. Its analysts expect the pace of US rate increases will be slow, in line with the current market consensus. Related to this, the Consultancy believes that the upside for the US dollar is limited. In addition, confidence in central banks has been shaken and there are mounting concerns towards the increasing number of negative policy rates around the world. All these factors are seen as being positive for gold in the current year.
Finally, Metals Focus notes, the landscape across other investment classes is also positive for gold, given the turmoil in equity and bond markets and signs that the wider commodity bear market may well have passed.
The consultancy therefore expect that investor inflows into gold will continue in the months ahead, as an increasing number of managers are convinced by the metal’s medium-term prospects and as interest also grows in the wealth management and private banking sectors from which gold had almost been seen as of no interest over the past three years of seemingly ever-rising general equities. Given the overall long overhang in gold remains low, compared to the levels seen during the bull market, the analysts believe that there is scope for fund inflows to remain significant.
Coming back to gold’s fundamentals it is also reckoned that these are trending positive for the metal too. After years of consistent increases, mine production is seen as beginning to decline this year, although perhaps only marginally so. Scrap supply is also forecast lower.
Jewellery and physical investment demand are seen as remaining virtually unchanged, in spite of higher gold prices. Finally, the consultancy notes, while the overall volumes may decline somewhat, central banks will remain net buyers for yet another year, although the vast bulk of this demand is coming from only two nations – Russia and China. Will others follow suit?
Metals Focus does warn however that any upwards path for the gold price will not necessarily be a smooth one. It points out that over the past few days in late March, the gold price suffered a 6% correction from its earlier peak. Further losses cannot be ruled out, particularly given public data and field research both suggesting some of the recent buying had been tactical rather than strategic in nature.
Likely triggers for moves both up and down will continue to come in the form of changes in the consensus expectations for US monetary policy, moves in the strength or otherwise in the US dollar, equity and bond markets. Nonetheless, Metals Focus believes that such corrections will be both limited and short-lived, with the December lows unlikely to be revisited.
So $1,350 gold by the year-end. As noted above the true gold bulls will be looking for a higher figure and may be disappointed by the Metals Focus conclusions. But for the long suffering gold investor, and for the gold miners which are generally in a far better position than many doom and gloom merchants have been suggesting, a year-end gold price at this kind of level will be very welcome.
For more information about the Metals Focus Gold Focus analysis click on www.metalsfocus.com