Five things happening to the yellow metal

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Australian Economy, Chinese Economy, European Economy, Macro Economics, UK Economy, Uncategorized, US Economy

Recently, we have seen a lot of up and down in gold prices with a lift majorly witnessed in the last few months. With this gold has emerged as one of the best performing major commodities this year. The key things to be noted relate to the following:

Solid gold rally post Brexit: The result of Brexit put the global markets in a turmoil but benefited the yellow metal, gold, which rose to the highest since 2014. Gold has risen almost 25% reaching its highest level since March 2014 at $1374.71 post Brexit. Given this rally, gold based mining companies or companies dealing in gold, delivered a solid performance this year. Newcrest Mining (ASX: NCM) delivered a year to date return of over 98.15% (as of August 05, 2016) while Evolution Mining Ltd (ASX: EVN) generated over 113.67%. Northern Star Resources (ASX: NST) surged over 89.2% during this year to date while Independence Group (ASX: IGO) rose over 70.08% in the same period.

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 Strengthening US economy might dent gold prices: The strong jobs report for US labor data (with unemployment rate expected to fall to 4.8% in July from June’s rate of 4.9%) indicates better outlook for the world’s largest economy. In fact, non-farm payrolls show 255,000 rise in employment in July 2016. The strengthening US economy indicates that if interest rate rises, this could damage gold prices in the short run. Gold is highly sensitive to interest rate rise as the cost of holding rises while boosting the dollar in which it is priced. Gold prices are highly influenced by dollar movements. The weakness in the dollar results into rise in precious commodity like gold. The falling income from bank and government also has appeared to result into the investment in gold, raising its demand while influencing its prices for an upward movement. Coming back to the US economy, the US Q2 GDP data came at 1.2% much lower than market expectation of 2.6%. This resulted into weak dollar and supported the yellow metal. Gold enjoyed its rally in low interest rate prospects and weakening dollar.

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Gold Spot Multi-Contributor Commodity Cash (Source: Thomson Reuters)

FED indicated interest rate rise in September: After two-day meeting, the central bank’s rate setting open market committee, issued a statement that “opened the door to an interest rate increase later this year, possible as early as September”.  This means there would be rise in interest rate in September.  The rates have been unchanged since a modest rise in December. The rise in interest rate now would mean that the economy is accelerating, which would make the dollar stronger and weaken the gold prices. Gold prices are inversely related to interest rates. As indicated by FED to hike interest rate, gold prices reacted to news and have fallen.

Boost from interest rate cut by Bank of England: Gold benefited after the Bank of England cut interest rates on Thursday. BoE reduced interest rates by 25 basis points to a record-low 0.25 percent.

 Growing demand from China and Russia: According to IMF, China bought monthly amounts of ~ 11 tonnes in January to April 2016 although maintained May reserves constant. Russia is also on the similar course. The rise in demand from these countries will keep gold prices upbeat.

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 Amidst this environment, gold mining firms with solid reserve base and positive exploration prospects have continued to drive shareholders value and withstand gold prices volatility. One such stocks could be Newcrest Mining (ASX: NCM) which has gold reserve base with average reserve life of 28 years and it is among the low cost producers. For FY16, its net debt reduced 27% to $2.1 billion as on June 2016, gold production increased 0.7% to 2.4 moz while copper production decreased 14.2% to 83kt. New Talisman Gold Mines Ltd has entered into binding agreement over Rahu projects with Newcrest International Pty (NIP), wholly owned subsidiary of NCM. NIP was awarded with five-year exploration permit for Rahu project by the New Zealand government. Even Independence Group (IGO) earlier reported that it has three operating mines and one under construction with wide portfolio of gold, nickel, zinc, copper, cobalt and silver. It recently completed $250 million placement at $3.75 per share to increase financial flexibility and strengthened balance sheet. The company has undertaken the expansion and resources extension at Nova Nickle/ copper project construction and Tropicana mill expansion and resource extension. Tropicana has potential to extend mine life beyond initial 10 years. The company informed that the gas project at Tropicana is well-progressed and 292 km pipeline is already completed.

 

What next?

The US’ mixed data have diminished expectation and now heading into second half, investors were eying on July’s US employment data, which is strong with the rise in jobs better than market’s expectations. This might set new tone for gold prices. As per the Economy forecast agency, gold forecast for August 2016 has been an initial price of $1350, maximum price $1478, and minimum of $1210. On August 05, 2016 ahead of the US employment results, spot gold was up 0.2 percent at $1,363.36 an ounce by 0633 GMT.

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