Bear and Bull Market

How Gold Prices Have Beaten Expectations of the Bears


Gold prices have been on an upward trend since the beginning of the year. On Thursday, the shiny yellow metal was trading at just under $1,370 an ounce. This is the highest price of gold in the past two years. Contrary to market expectations of the bears, year-to-date gain in gold has been about 30% or $300 per ounce.

The upward movement in gold prices has surprised many market pundits who had painted a gloomy picture for gold and other precious metals at the start of the year. Price of gold has surpassed LBMA forecast survey results for 2016 by a large margin. Experts had predicted that gold prices would average only $1,103 per ounce this year, which shows how bearish market sentiment was at the start of this year. Only six out of the thirty six experts who had been surveyed had predicted gold prices to cross $1,300 in 2016.

Obviously gold prices may resume its downward slide dashing the hopes of bulls by the end of the year, but most market experts have developed a consensus in recent weeks that gold is expected to end on a record high note this year.

Increase in prices of gold on Thursday this week was the highest in a single day since the European debt crises in 2010/11, . according to the World Gold Council.

Return of the Golden ‘Jedi’

According to market analysts increase in precious metal prices this year represents a surge in investors’ concerns over plight of the global economy. This sentiment has gone bleaker after the voting results of Brexit on June 23 2016, and whose market implications are yet to be fully realized.

Apart from gloomy prospect of the global economy, gold prices are also said to be driven in part by purchases made by China and Russia to decrease their reliance on the dollar.

Experts say that China and Russia have provided strong support for gold. These two countries have bought an average of 11 tons and 14 tons, respectively, from January to April this year.

As a result of increased demand of gold bullion, analysts are now forecasting that gold prices will reach $1,400 going into 2017. Some of the financial experts especially those at BofA Merril Lynch and Credit Suisse are forecasting gold prices to be $1,500 at the end of this year. This represents a remarkable comeback for gold that has remained in the sidelines for the past five years.

Dutch Bank ABN Amro that in the past has maintained a bearish outlook has revised it end of the year forecast to $1,425, and adding that the prospect of a Trump presidency may explode the price of gold in coming years.

World Gold Council has stated that a ‘perfect storm’ in the financial market forced investor to once again turn to gold to hedge their investment. The council had added that investor trust in alternative safe choice – government bonds of developed markets – has been shaken due to unconventional central bank policies.

Developed countries’ government bond returns have trended low due to central bank policies of spurring local economy by keeping the rates low. To add fuel to the fire, some central banks, for instance the ECB, have tried to stoke demands by purchasing bonds, which has further lowered yields on bond. Another ‘unconventional’ policy pointed out by the World Gold Council is weak bond auctions by the Bank of Japan.

The Japanese central bank’s auction of the 10-year bond received the weakest demand in the past five months, which experts say was due to sordid state of the economy where deflation and rising yen value is creating problems for the policy makers.

On Tuesday, a Japanese 10-year-bond auction drew the weakest demand in five months. That was after Japan announced a stimulus package worth over 28 trillion yen, or $275 billion, but smaller than markets had expected.

US Feds have also acted unconventionally in the eyes of the investors by keeping rates at low rates. While chairman Janet Yellen had made a statement in December last year that implied Feds intent to gradually increase the rates, experts now say that a cut in rate is more likely in the aftermath of Brexit.

Weaker US GDP figures in Q2 this year (1.3% vs. 2.6% expected) has increased the expectations of a rate cut that will further hurt yields on government bonds and put downward pressure on the greenback as well. Treasury yields and dollar have been historically negatively correlated, which increases the prospect of a continued increase in gold prices this year.

Final Words

The unconventional approach taken by central bank policy makers has left investors concerned about the effectiveness of bond to provide fixed income, due to which they are turning to the grand daddy of the investment instrument – gold.

This year gold prices have outperformed S&P and other commodities treating investors who had placed trust in gold to a double digit returns. This trend is expected to continue so long the uncertainty caused due to recent (hint: BRexit) and upcoming events such as US presidential elections remains in the market.

Experts say that weak performance in the stock and bond market is an indication that investors are losing confidence on the conventional financial instrument. In the current environment, gold appears to be a silver lining in the cloud for investors.

In the present environment it is expected that gold will continue to gain investor confidence, and provide them with above average return on investment. As central banks are purchasing more bonds, they are limiting returns and yields available to investors.

Lower opportunity costs of alternative investments have increased the lure of gold for investors. In the financial markets no one can make accurate predictions, but one thing looks certain is that this year at least gold will surprise policy makers and financial experts alike by its upward climb treating investors to a high return on investments.

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