Is it time to pile back into gold?

A recovery in gold price may still take time to unfold, but pessimism over the precious metal has started to break up

PUBLISHED : Monday, 19 October, 2015, 8:45am
UPDATED : Monday, 19 October, 2015, 9:50am

A recent rally in gold prices has refuelled debate if the precious metal is poised for a recovery after slumping this summer to its lowest in five years. Analysts still vary on their prices, but it seems the overall bearish drag on gold is behind us.

The yellow metal has staged a decent rally, gaining roughly 6 per cent during the first half of October and adding 8 per cent since reaching a five-year trough of US$1,084.65 per ounce in early August.

Gold prices are turning a corner, according to Canadian lender Scotiabank, citing increases in gold exchange-traded fund holdings and net long fund positions.

The net long fund position in gold in US Commodity Futures Trading Commission data have risen to over 76,000 contracts recently from a half-year low of 24,465 contracts in July, a sign short positions were covered and reflecting a less downbeat outlook in the market.

In the long run, emerging markets where currencies have depreciated drastically following the yuan’s devaluation will be yearning for a safe haven and anchored on gold, the Canadian lender said.

“The currency weakness alone is likely to cause economic problems as companies in these countries service their foreign debt, but the problems can take time to manifest themselves as it takes time for the damage to show up in quarterly corporate earnings.

The economic hardship will no doubt weigh on jewellery demand in the region and weaker currencies will see gold prices in local currencies rise, but investors in the region may well look at gold as a way to hedge currency and equity weakness,” Scotiabank said in a note.

China’s central bank will be a solid buyer as the country pushes for the yuan’s inclusion in the International Monetary Fund’s currency basket.

Gold makes up some 1.6 per cent in the People’s Bank of China’s total reserves, compared to an average of 67 per cent in Germany, France, Italy and US.

“If China is now seen as a regular buyer of gold then that should instil some confidence in the metal,” Scotiabank said.

Gold’s recovery, as is the case for many other asset classes, hinges on an interest rate hike in the US and the strength of the greenback. If the US dollar index, which gauges the dollar’s value against a basket of currencies, peaks in the first quarter next year in the event of a Federal Reserve rate hike in December, gold will trade to US$1,200 towards the end of 2016, according to ANZ.

Such a view is slightly more upbeat than a Reuters poll where the median price of gold is $1,157.8 in 2016, improving from a median of $1,127.6 for the fourth quarter.

Similar to Scotiabank, ANZ also sees the bullion having bottomed out and priced in the negatives from a Fed rate hike.

“We still expect gold prices to react negatively to a hike in the Fed Funds rate, but the extent of the decline in gold may not be as aggressive as we previously forecast. Consequently, we expect the gold price to reach the bottom of its recent range over the next couple of months, as opposed to making fresh lows when the Fed does eventually hike interest rates,” ANZ said.