Gold does a moonshot, Goldman buying

June 27, 2016 at 16:39


As the UK voted to leave the EU, the only people celebrating more than Brexit politicians were a clutch of small brokerages that benefit when the world get’s a little more volatile: bullion dealers that offer gold coins and bars to retail investors.

From London’s Harrods department store in Knightsbridge, to online precious metals dealers, many reported record volumes and demand on Friday. Sharps Pixley, which has a store in Mayfair, said online sales had drained its stocks of larger bullion bars, leading it to call on emergency reserves in Germany.

Thea retail demand is an indication of the desire for a safe haven investment in the wake of a Brexit vote, which sent gold to a two-year high above $1,350 a troy ounce and sterling to its lowest level against the dollar in 30 years.

The UK’s Royal Mint says it has seen increased demand for precious metals, especially Sovereign and Britannia bullion coins and gold bars, since the start of the year. On Friday the number of visitors to its online platform rose 550 per cent compared with the day before.

But once the headlines sink in, analysts are questioning whether gold will be able to make further gains, having already risen by almost a quarter this year in dollar terms and by a third in sterling. For all the volatility a Brexit vote could trigger, gold faces its own headwinds.

“We believe that there remains limited price upside for gold from current levels after today’s safe-haven driven jump higher,” says Helima Croft, head of commodity strategy at RBC Capital Markets.

“Gold will have to contend with a strong dollar and will probably refocus on global monetary policy (namely the Fed) for the remainder of 2016.”

The precedent of the financial crisis guides many analysts’ thinking. After Lehman Brothers collapsed gold fell almost a third as far more money flowed into the dollar. While the fallout from the Brexit vote is not expected to be that severe, many are still urging caution about gold’s short-term ability to weather financial and political shocks should the dollar rally.

Goldman Sachs recommend clients buy gold only in sterling or euros to mitigate that impact.

“While a leave vote creates upside in gold prices, we believe much of the upside should be in gold denominated in GBP and EUR given the more profound impact that the vote has on Europe,” Goldman analyst Jeff Currie says.

“The ultimate trajectory will depend on the intensity and duration of the uncertainty shock created by the leave outcome and any potential revisions to the US growth outlook, both of which remain highly fluid.”

Joe Wickwire, portfolio manager at the Fidelity Select Gold Portfolio, says investors may still look to gold as a way of protecting their portfolio against negative real interest rates, or the rate an investor receives after taking into account inflation.

“This is something that has been going on since the Fed hiked rates in December,” adds Mr Wickwire.

Investment demand could also strengthen further as a result of the upcoming US election, with many pundits seeing evidence of a populist spirit in the Brexit result being reflected by Donald Trump’s candidacy.

The Federal Reserve has also become more cautious on further interest rate increases.
“It is now highly likely that the Fed will be unable to hike rates this year. The ‘one and done’ mantra is back and has a lot more credibility now than it did a year ago,” says Tom Kendall, an analyst at ICBC Standard Bank.
Jewellery demand in China and India, the world’s biggest consumers of the precious metal, has been lacklustre this year.

Offsetting that has been increased demand from gold-backed exchange traded funds this year, which have seen inflows rise more than 30 per cent to 53.3m ounces — their highest level since 2013.

Investors also need to watch fund positioning, which has seen speculative positions on the Comex gold futures exchange hit a record level. Short-term volatility could also deter bullion dealers and jewellery buyers, according to Mr Kendall.

Producer hedging — or miners selling forward future production — may become increasingly attractive if they doubt the sustainability of gold’s rally.

Still, some investors remain confident the precious metal will keep rising as the UK hammers out the details of its withdrawal from the EU. The twists and turns of that process should keep the market engaged, according to Jeff Nichols, managing director of American Precious Metals Advisors.

“Uncertainty is good for gold,” Mr Nichols says. “And we’re certainly going to have more uncertainty.”