INCREASING political uncertainty and rising geopolitical risk are providing strong support for gold in the short term, despite the spectre of higher US interest rates, according to the ANZ Bank. These factors could see prices push past US$1300 per ounces over the next 12 months.
|World above ground gold stocks. Source: Thomson Reuters GFMS, ANZ Research.|
In its ‘Gold Market Report 2017’ ANZ Research says, “We see gold holding above US$1250/ounce in the short term. Safe-haven buying has supported gold prices over the past six months, and rising geopolitical risks, particularly in the US, are likely to propel prices higher. If the US political situation worsens, there is an increasing possibility of prices breaking through US$1300.
“We think the environment is conducive to higher prices. Much debate has taken place over the impact of rising US interest rates on gold, but we don’t see it as a negative. Gold has pushed higher in all but one of the past seven rate-hike cycles since the 1970s and has outperformed in cycles where interest rates were increasing relatively slowly. Even without the support of safe-haven buying, we anticipate a strong environment over the next 12 months.”
The report also states that there are some positive long-term prospects with emerging markets to drive demand for physical gold. “The substitution effect will ultimately be positive as the institutional investor base in Asia continues to grow.”
Demand in coming decades will be supported by Asia’s emerging economies. “China and India are already the world’s largest gold consumers, so demand for gold will increase as incomes rise in those countries.” Despite these statistics, consumer demand in Asia is only half that of developed countries, leaving significant upside.
The bank’s long-term outlook for gold is summarised:
- The gold price is likely to rise above US$2000/ounce by 2025 - this is our central-case for the gold price. While prices may trade only marginally higher over the next few years, we believe the combined effect of greater demand from investors and central banks will see prices rise over the long term.
- Asia will account for over half of the global economy by 2050 - the rise in regional incomes will support demand for gold investments. China and India are the world’s largest gold consumers and incomes in both still have a long way to rise before reaching developed-world levels.
- Central banks are likely to increase holdings - Most buying will come from emerging markets’ central banks, as they move closer to developed-world levels. The supply side is also supportive of price, as gold mines can’t expand rapidly. Prices below US$1000/ounce are unsustainable in the long-term.
- Gold has a unique role as an investment and a defensive asset. We believe it will remain an important part of investment portfolios for the private sector and central banks. Gold is a store of wealth in unstable times and, while global finance has weathered a decade of storms, the future is uncertain.
- Beyond being the world’s largest producer and consumer of gold, we believe China will eventually dominate the price recovery process, as Asia’s financial centres open up.
Regarding supply, the report says this is critical in determining not just its price but its use. “One of the main concerns about the use of gold as a monetary unit by central banks is the need for adequate supply and the distribution of that supply. Over-abundant supply can be inflationary.
“The supply of gold has historically come from mining, though in recent years scrap supplies from recycled electronics and jewellery have accounted for a larger proportion. Comparatively, supply of scrap gold has risen by an average of 6.5% y/y over that time.
“Central bank selling, which has been a feature of physical gold supply for 20 years, has changed, and now central banks are net accumulators. Producer hedging, which used to add an average of 6% to global supplies each year, is no longer a prominent feature of the market. Today, producers only hedge on a very selective basis and the desire to be leveraged to the gold price, a key reason why hedges were originally lifted, is still in place.”
“Mine production is generally stable, with little response to price fluctuations. Production has risen by an average of just 0.9% y/y between 1995 and 2016. Unlike the supply of silver, which is far more evenly distributed around the world, the production of mined gold is concentrated in South Africa, Australia, the US, China and Russia.
“China is now the world’s top producer at just over 450 tonnes a year, and it is growing. This is over four times the amount of gold it produced just 20 years ago. Despite this, China is also the world’s largest gold importer. In terms of gold output, the fastest growing countries over the past few years have been Indonesia and Canada, while Australia, Russia and the US have been stable and South Africa has declined.
In conclusion, ANZ says, “Gold has a unique role as both an investment and a defensive asset. We believe it will remain an important part of investment portfolios for both the private sector and central banks. Gold is a store of wealth in unstable times and, while global finance has weathered a decade of storms, the future is uncertain.”