There are a number of conclusions that can be drawn from this year's rally in the gold market. It of course reflects the uneasiness of investors about their money; it also correlates to the dismal performance of the global economy, and the worsening outlook thereof. Further, the surge in the gold market undoubtedly relates to the weakening of the U.S. dollar and the unfathomably low interest-rate environment.
On top of all these things, the rally for gold during the first quarter also signals not only the end of a long bear market but also the potential beginning of a new bull run.
Run With the Bulls
Don't take my word for the signs of the emergence of the bull market in gold: this is also the view of the prestigious World Gold Council (WGC), an organization that tracks and reports on industry trends. This is thanks in no small part to the 17% jump in the gold price during Q1.
The WGC compared this data from the most recent rally to previous cycles of bear and bull markets for gold. The low near $1,050/oz notched last December fell squarely within the median range of where previous bear gold market periods found their bottom—both in duration (~4 years) and intensity (~45% decline). The Council states that it would be especially encouraged by a second consecutive strong quarter for the yellow metal.
Gold Market Rally's Contributing Factors
As mentioned in the opening, there are several reasons why gold has been charting an upward path so far this year. The WGC focuses on five key contributing factors (directly quoted below):
ongoing concerns about economic growth and financial stability in emerging markets;
a hiatus in the rise of the US dollar;
the implementation of negative interest rate policies by several large global central banks;
the return of pent-up investment demand for gold; and
price momentum stemming from investors following gold’s upward trend.
Two other signs of gold's momentum can be found in the increased demand on both the physical market and paper gold market. For the latter, gold ETF holdings have risen a staggering 363 metric tonnes in 2016; meanwhile, the U.S. Mint alone has seen its gold coin demand explode 51% higher year-on-year compared to Q1 2015.
Analysis Backs up WGC
You may reasonably wonder if the World Gold Council is inclined to have a positive bias in favor of gold's outlook. However, an analysis of the end to the bear market in gold points toward the same conclusion. This can be done with the popular SWOT method—an acronym for evaluating the strengths, weaknesses, opportunities, and threats to the market. Here is just a sampling from a SWOT analysis of the gold market.
Strengths: Uncertainty surrounding monetary policy continues to drive safe haven demand for gold and other precious metals. Moreover, it's not the just the U.S. Mint that's seeing strong gold bullion sales: Australia's Perth Mint saw its March sales of gold bars jump to 47,948 troy ounces (~1.5 tonnes!), an increase of better than 10,000 oz from February.
Weaknesses: Higher gold prices are actually putting a damper on demand in places like India, where a jewelers' strike brought the world's largest gold market to a near standstill for weeks. To the same token, the build-up of net long positions in gold futures may put a cap on the metal's continued upside.
Opportunities: While the near-zero and even subzero interest rates being used by central banks around the world are being used to combat deflation and spur growth, it is entirely possible that all of this "easy money" sloshing around the economic system will result in a wave of inflation down the road. When this happens, gold could quickly shoot to $1,350/oz in the short term.
Threats: If the U.S. economy does indeed improve (and many in the mainstream continue to stubbornly believe that it will), investors would predictably rush back into equities. Some predict this would send gold prices back down to the $1,120/oz to $1,130/oz range as a near-term target as yield-hungry investors shun commodities.
Depending on what the gold market's performance during the second quarter shows us, it may finally be time to declare an end to the past three years' bear market and welcome in a new bull market.
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.