Since the beginning of the year sentiment on gold has improved, mainly as a result of concern about a global economic slowdown, of the perception that most major central banks will maintain their loose monetary policies, and of the fear that negative rates will become generalised. However, intriguingly enough, since mid-February the yellow metal has continued to edge up, hitting its highest level in a year despite the equity markets’ recovery and the stable US dollar. Last Friday gold even shrugged off the promising US employment report as it had done a week earlier with the strong GDP. At least one rate hike this year has been priced in by the market but the situation should become clearer as to the Fed’s intentions and maybe the timing of its next hike at the 16 March FOMC meeting. This could weigh on gold, as would an announcement on 10 March by the ECB of aggressive new stimulus and/or a rate cut.
Inflows into ETFs are at their fastest pace since 2010, indicating strong investor demand. Furthermore gold is being underpinned by strong Asian physical demand, with India’s gold imports surging 62% in January year on year, while gold appetite in China is also expected to keep growing, whetted by the risk of a yuan devaluation. Despite this we remain prudent on gold for the time being as we believe that in the short term the metal could be due for a pull-back, weakened by the ECB’s and FOMC’s strategies. However, we do not dismiss the possibility that gold could continue to be boosted by a variety of factors such as geopolitical tensions (the Middle East, the North Korea missile threats) and a potential Brexit.
Névine Pollini, Equity Analyst