Gold – onwards and upwards!

The strength in gold, since the start of the year, is still being watched by investors. It has continued its rally even when stocks recovered over the course of the week.

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.  

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