This year’s big rally in gold has prices up over 17% so far this year, as a plunging stock market and oil prices drive investors into safe havens. With over $7 trillion in government bonds at negative yields, gold has become the go-to asset for diversification. The huge jump in gold demand in the last two months has been the largest climb since 1980. Calls of a bottom in the gold market has lured momentum buyers into throwing their hat in the ring, especially for gold coins.
Gold is Back on Everyone’s Radar
Physical gold (and silver) saw huge crowds “buying the dip” in 2015. The US Mint recorded a 52.8% increase in American Gold Eagle sales for the year, while the American Silver Eagle set a new all-time sales record of 47 million ounces. This was the seventh year out of the last eight that Silver Eagle sales have hit new records.
2016 is looking even better, as sales year to date are the best they’ve been since at least 2013. Silver Eagle sales are at 9.9 million, and total gold coin sales (Gold Eagle and 24K Buffalo) are over 243,000 ounces. Other mints are also seeing strong sales of gold coins on the present rally. And it’s not just individuals jumping on the gold train. The central bank of China has been voracious buyers of gold for months, and contrary to many reports, the Chinese continue to scoop up vast quantities of gold coins and bullion.
Gold Crowds Grow
It’s intriguing that “buying momentum” in the gold market has only risen as the price of the metal has increased. The sustained rally for the precious metals has led many investors to pile into gold—and gold coins especially—as the metal becomes more and more attractive.
In fact, gold dealers in Britain are reporting that the high gold goes, the larger the crowds demanding bullion get. This influx of “physical momentum buyers” bring forward the real possibility of short-term shortages in gold coins and bars. Gold demand has grown so much, so quickly, that distributors could end up short of stock before refineries and mints can ramp up production. Higher prices will lure more scrap gold onto the market to cover any shortfall in mining supply, but it will take time for it to be processed.
It isn’t just individuals that are alarmed at the fall in stocks and economic growth. Institutional investors are jumping on the gold train as well. The momentum in gold demand is increasing, and as long as stocks and oil are falling, gold prices will likely continue to rise.
Why Is Gold Higher?
Gold has become the go-to safe haven, due to negative bond yields and worries over the Federal Reserve’s ability to raise interest rates in the US. One of the big knocks on gold according to its detractors was that it doesn’t pay interest. With bonds of most major nations requiring you to pay the government to lend them your money, gold is actually on the top of that equation.
The US dollar has lost much of its safe haven demand due to the Fed. The Japanese yen has taken over some of that role, but with negative interest rates, any safe haven flight into the currency rapidly bails out. If you can’t buy bonds, and currencies are devaluing, gold becomes the only game in town to protect your purchasing power.
Has Gold Put In A Bottom?
The worst start of the year for stocks in living memory soon had gold back on everyone’s minds. Negative sentiment in gold futures hit their low point last December, with prices near $1,050, but exploded after New Years. Momentum investors started piling in after safe haven demand ignited the present rally, lifting Gold ETF inflows. The SPDR Gold ETF has recorded multiple new 52-week highs so far this year. In fact, the first two days of this week saw gold ETFs buy the equivalent of one week of global gold mine production.
With equities markets attempting to enter a major reversal, and geopolitical turbulence at a high, more analysts see gold as having put in a bottom. HSBC analysts recently said that they expect any pullbacks in gold prices “would likely be temporary.”
The main movers for the stock market in 2016 to date has been oil and commodity prices, and earnings reports. Currency devaluation in Europe and Japan due to negative interest rates has hurt US companies’ profits. The economic slowdown in China has driven commodities into a severe bear market. The actions of OPEC in pumping oil as fast as they can, to drive their competitors out of business has crude prices 70% lower than their recent peak in 2014.
Since energy and mining stocks have been the main drivers of a shaky market, all the major stock indices have closely tracked the price of crude oil. Oil prices have been extremely volatile, all the while trending downwards to new lows as no one wants to be the first one to cut production.
In short, all of this points to an improved outlook for gold compared to stocks and other commodities.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product