Is 2016 the year of gold and silver?
Global instability has prompted investors to resort to safe haven assets, and bullion has emerged as the most preferred investment instrument
Mumbai: The flight to safe haven assets triggered by global political and economic uncertainty has made bullion the year’s most preferred investment, with gold and silver beating other asset classes by a mile.
Gold is now the best performing asset of 2016, emerging from a three-year bear market. The yellow metal has gained almost 26% since 1 January, the best half-year performance since 1980, Bloomberg data showed.
Silver, following gold, rose 30% in the first six months, leaving other assets such as the US and German bonds, Japanese yen and the US dollar far behind.
The US 10-year bond yields are down close to 80 basis points (bps) since 1 January, while the Germany 10-year bond yields are down 73 bps. Japanese yen has risen 17%, while the dollar index is down 2.53%. One basis point is one-hundredth of a percentage point.
Analysts said the shock result of UK’s EU referendum vote last week further strengthens bullion’s appeal as a safe haven asset.
The past four sessions following the Brexit vote saw gold prices spike about 6%, while silver advanced about 5%.
Strength in the US dollar was the major contributor to weakness in gold and commodity prices for the past few years. However, increasing uncertainty about economic and political developments, low-to-negative interest rate environment as well as doubts over global economic recovery post the collapse of Lehman Bothers in 2008 have led to demand for precious metals, analysts said.
Ronald Peter Stoeferle, managing partner and fund manager, Incrementum AG in Liechtenstein, attributes the return of gold as an asset class to growing economic uncertainty.
“The already tense political situation in Europe has been complicated further with the Brexit, which had not been expected by the markets… We believe that the events of the past year are validating our views and are maintaining our gold price target of $2,300 per ounce by June 2018. Apart from gold, silver and mining stocks offer very interesting opportunities,” said Stoeferle, who released the 10th edition of “In Gold we Trust’ report on Tuesday.
Gold for immediate delivery on Comex was quoting at $1,327.30 an ounce at 12:32pm in New York on Wednesday, according to Bloomberg.
The price surge in the yellow metal this year is visible in gold-backed exchange-traded funds (ETFs). Gold assets in ETFs have expanded 13.5 million ounces this year to over 60.3 million ounces. Holdings in SPDR Gold Trust, the world’s largest gold ETF, are up 47.48% to 30.45 million ounces (947.38 tonnes) as of Tuesday. Wednesday’s data was not available at the time of publication.
New bull market
Stoeferle said that a new bull market in gold was emerging. The jaw-dropping rally during the first few months of 2016 can be seen as a hint of what may lie ahead, he added.
A Bloomberg report on Tuesday quoting gold industry veteran Jake Klein also said that gold may be at the start of a major bull market if the UK’s Brexit vote proved to be a forerunner of greater political and financial instability around the world. Moreover, investment bankers such as Morgan Stanley and Goldman Sachs Group Inc. also raised their forecasts for bullion, citing flight to safety sentiment, it said.
Analysts said that the revival in interest in gold investments is also positive for inflation-sensitive assets like silver and mining (gold and silver) stocks.
Sugandha Sachdeva, assistant vice-president and in-charge, Metals, Energy & Currency Research at Religare Commodities Ltd, said that the market will also see the beginning of a strong run in silver prices, after the white metal yielded negative returns for the past three years and was a forgotten asset class amid consolidation.
“Global economic uncertainty, concerns of slowdown in China, accommodative monetary policy of the major central banks and weakness in dollar earlier this year had prompted investments into safe haven assets like gold and silver. Precious metals have made a comeback this year, registering stellar gains in the first quarter of this year. The bullish theme has got a further boost with surprise results of UK’s referendum vote to leave the EU and global turmoil it has evoked, leading to ‘risk off’ sentiments in the market. It will take time to understand the implications of Brexit on the global economy, where volatility and wild price swings are expected to persist,” Sachdeva said, adding that gold may touch ₹ 34,000 per 10 grams by year end, while silver may test ₹ 48,000 per 1 kg.
Sachdeva also highlighted gold-to-silver ratio as another indication for the rally in bullion prices. The ratio, which compares the value of a single ounce of gold with that of silver, spiked to 83.28 levels in late February. This was close to the peak level of about 84-85 seen in the aftermath of the 2008 recession.
At the time of crises, gold had rallied to $1,923 an ounce in three years from $681 an ounce. Silver rallied to $51 an ounce in three years from $10 an ounce, data showed.
“With investors engaging in flight to safety towards gold and silver, the prices are likely to get an upward thrust, where silver is on the point of outperforming gold over a medium-term time frame. Overall, silver has regained its charm in 2016, after three years of weakness and consolidation. The current economic backdrop, along with fading prospects of an interest rate hike by the US Fed at least till December validates further march of bullion on the upwards trajectory over medium-term,” Sachdeva added.
Comex Silver prices were quoting at $18.37 an ounce at 12:32pm in New York on Wednesday, according to Bloomberg.
Gold futures for August delivery on MCX closed at ₹ 31,336 per 10 grams on Wednesday, up 0.07% from previous close.
Silver futures for July delivery ended at ₹ 43,122 per 1 kg on Wednesday, up 1.83% from previous close.
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