Gold: Bullish or Bearish?

When the Gold price was hovering around the USD 2,000 per troy ounce(oz) levels, there were speculations that we may witness a repeat of the significant event back in 2011 that resulted in the end of the decade long bull run of Gold. It is worth mentioning a couple of the the contributing factors that differ then and now.

 

1. Inflation has been the talk of the town in 2011 with observable inflation readings.

 

Since the onset of the Russia-Ukraine conflict, the ripple effect is evident through the enhanced focus on ESG concerns and the impetus towards onshoring and energy market fragilities. All these weren’t in play back in 2011.

2. The exuberance towards yellow metal in 2011 versus the subdued sentiment this time round is clear from the following chart.

 

According to the Topdown Chart by Thomson Reuters, Gold ETFs versus the total ETF market is only at 2% in 2020, comparatively to 8% back in 2011.

In comparison to 2011, Gold is projected to be in a healthier position with inflationary dynamics more supportive of the precious metal in the current times.

The majority of the investors would concur that higher interest rates are an aversion to Gold. Commonly, it is anticipated that when the Central Banks ease monetary policy, the gold price tends to react positively, whilst the opposite tends to happen when there is an expectation of tighter Central Bank policy. Reality has proven to be much more complex due to the Russia-Ukraine conflict. Not only is Russia the second-largest producer of Gold, mining about 10% of the world’s new supply each year, but its Central Bank also holds an estimated $145 billion in Gold reserves. This creates a great deal of uncertainty about the short-term future of the gold market. Disrupted trade could lead to a shortage of available Gold internationally, pushing the prices up. On the other hand, the economic pressure of the sanctions on Russia could force Kremlin to liquidate its Gold in exchange for currency, this would flood the market with an estimate of 2,000 megatonne (MT) of Gold, equivalent to about two-thirds of the total worldwide Gold production of a typical year.

Without a clear resolution to the Russia-Ukraine conflict, there’s no telling when will the market return to a more stable state. Strong underlying inflationary pressures continue to be the main supportive fundamental factor driving the Gold price.

In times of uncertainty, people generally have the tendency to turn to precious metals as a hedge for the time being and avoid speculation. There’s a Chinese saying that says: “When there is a crisis, there is money to be made.” Which asset will you look to channel your funds to?

 

Mindy