(Kitco News) - The effect that U.S. rates have had on the gold price is “overdone” and may take a back seat this year, said the World Gold Council today in its 2016 outlook and 2015 review.
At first glance, 2015 was not good for gold, the council acknowledged. Gold’s dollar price was down by more than 11% by the end of 2015, investor sentiment was bearish: average net-longs reached their lowest level since 2003 and gold-backed exchange-traded funds saw outflows of 100 tonnes.
The council explained that in the months leading up to the U.S. Federal Reserve’s first rate hike in 9.5 years, higher bond yields strengthened the dollar, putting pressure on gold.
“We believe that 2015 was an exception and not the rule. While the U.S. dollar is certainly a significant driver for gold, there are two additional important points to consider: (1) it is not the only driver, and (2) it is not always the most relevant metric for most investors,” the report suggested.
The council added, “In our view, interest rates are not a dominant driver of the gold price once the effect of the dollar is taken into account. And the dollar has already strengthened more in the past two years than it has since the ‘dot-com bubble’ burst. In fact, the dollar is at the highest level it's been at the beginning of a Fed tightening cycle since the 1980s.”
This is relevant for two reasons the WGC said, “the dollar tends to revert back to its long run average and a strong U.S. dollar is a de-facto tightening mechanism, preventing the Fed from moving interest rates too far too soon and risk crippling economic growth.”
The report highlighted that while the gold price declined in 2015 in U.S. dollar terms, it was not the case in other currencies. They cited gold's price in the Turkish lira, Russian ruble and the Indonesian rupiah.
Physical Demand
The council said that more than 90% of physical demand for the yellow metal is coming from outside the U.S., primarily from emerging economies.
As of the third quarter of 2015, Indian and Chinese demand were up relative to the same period last year.
“In China, the PBoC’s periodical announcements on the additions to their gold reserves from June onwards and the Shanghai Gold Exchange’s intention to introduce a yuan-denominated trading mechanism
highlight the importance of this market. Similarly, the Indian gold trade has expressed its intent to establish a gold exchange in the not-so-distant future,” the report said
By Daniela Cambone of Kitco News; dcambone@kitco.com
Follow me on Twitter @DanielaCambone
