The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.
This behaviour shows that perhaps investors are not entirely convinced by the recovery in the equity markets and there is a change in the view of risk. Given the choppy market that is forecast for the rest of the year, interest in gold will be stronger than last year.
Gold prices have recovered 7%, so far this year, after a 28% slump last year. The Fed’s accommodative stance has provided a certain level of support. However, the flurry of activity into gold started from the beginning of this year. The main reason for this is due to the shift in investor’s thinking about asset allocation.
The precious metal suffered negative sentiment last year to a point where it failed to act as a safe haven in instances where there was stress in the market. The revival this year was evident during the EM turmoil, now it is the euro-zone uncertainty.
The change in attitude towards the precious metal was evident in the rise of call options by 24% for June 2015, futures at $2,200 an ounce. While the slump in prices, before the Lunar Chinese New Year, spurred demand for bullion sales, the recent rise in prices may crimp some of that. There are various reasons why gold prices are supported such as the weak US data, the Fed’s stimulus and the low interest rates.
These supportive reasons can quickly become headwinds as US economy growth is likely to continue to improve and the Fed’s reduction of stimulus is maintained. However, a gradual US recovery is unlikely to be smooth sailing and although the Fed has downplayed the labour market, the low participation rate is still a concern. This will lower the overall productivity in the long run.
The interest in gold is here to stay and although it may not reach the high of $1921 in 2011, prices will remain buoyed and testing the next level of $1350.