IS gold's rally a flash in the pan? Or is it entering a new bull run?
As is usual in times of volatility, the metal's rise is drawing a clear line between two camps: even as analyst after analyst raised their price forecast for the year, some - such as prominent investor Jim Rogers - are questioning whether the price for the yellow metal has much more upside left.
While markets have returned to a calmer state since British voters opted to leave the European Union, with uncertainty hanging over political developments in many parts of the world, it is clear that safe-haven assets led by gold will continue to be in vogue in the second half of the year.
But whether the gold rally will go beyond the year hinges very much on one thing - continued global low interest rates, particularly in the US.
The gold price, which has been climbing for five straight weeks, was trading at US$1,351.76 (S$1821.25)an ounce - near a two-year high - at 7pm Singapore time on Monday.
The reasons for the recent flight to safe-haven assets are not surprising. besides the uncertainty over the complex divorce negotiations between the UK and the EU and the implications of these for the global economy, there are also many other political anxieties weighing on the second half of the year.
These include the US presidential elections and fears of similar exit referendums in other EU countries.
As ANZ senior commodity strategist Daniel Hynes noted, "central banks stand ready to do whatever is necessary to contain volatility, most likely keeping liquidity abundant and intervening if required".
Against such a backdrop, developed sovereign bond yields have fallen to near zero or even negative - meaning investors are willing to pay more to hold the bond than they will get back in interest and repayment of principal.
Bond yields move inversely with price. Last Friday, all of Switzerland's government debt, including its 30-year bonds, started trading at negative yields.
In all, a record US$11.7 trillion of global sovereign debt has dipped to sub-zero yield territory, according data released by Fitch Ratings last Thursday.
This has only strengthened the argument for gold, as it reduces the opportunity cost of holding the non-yielding asset.
Already, about US$13-14 billion of money have made their way into gold exchange traded funds as asset managers moved from fixed income into gold earlier this year, Robin Tsui, vice-president at State Street Global Advisors, told BT.
Speculative and exchange-traded investors had also built substantial long positions on the Comex gold futures in the past month before the Brexit vote.
Citi Research foresees the referendum result to prompt a rise in long positions on gold and spur more inflows.
After the vote, Morgan Stanley hiked its 2016 price estimate by 8 per cent and 2017 by 13 per cent, while Goldman Sachs lifted its three-, six- and 12-month targets by US$100.
The high volatility would also set back the Federal Reserve's plans to raise rates even further, resulting in continued depressed global interest rates.
Central bank purchases
The World Gold Council, in a note last week, said that it is expecting an increase in central bank purchases of gold.
This is especially since the sterling has fallen to a 31-year low, and as Standard & Poor's and Fitch cut their rating on Britain's sovereign debt, taking it out of the triple-A rating club.
Why, then, did Mr Rogers, a renowned commodities bull, say he would rather buy the dollar than gold now?
The investor told Bloomberg that he believes gold prices are due for a drop after having risen by about 25 per cent this year, and will probably end the year lower than current levels.
But it is worth noting too that Mr Rogers also said that he would take short positions as a hedge against his holdings, rather than sell the gold he currently owns.
Others believe that the US dollar - another beneficiary of money looking for safe havens - will rise, which would affect the gold price in two ways.
It would, firstly, lead to a weaker gold price in the US dollar.
At the same time, this effect would be mitigated by the reduced chances of imminent interest rate rises, as the US Federal Reserve will become concerned about the adverse trade effects.
To mitigate the impact of a stronger US dollar, Goldman Sachs is recommending clients to buy gold only in sterling or euros.
These factors are compounded by weak jewellery demand in China and India, both of which have been traditional powerhouses in the gold market.
Indian demand for gold dore has been affected by a hike in import duties and a subsequent jeweller hike.
There are a plethora of factors that can influence the gold price.
But as Brexit newsflow reduces, investors' attention will once again turn to global monetary policies.
And one's view of how the gold price will move will inevitably be linked to his or her view of the pace and extent of the US rate hikes this year.
The implied probability for a Dec hike now is a mere 11.8 per cent, said OCBC commodities analyst Barnabas Gan, compared to a strong 74 per cent in end May.
That also means negative real interest rates - where the inflation rate is greater than the nominal interest rate - lending support for the gold price, said UBS commodity strategist Wayne Gordon.
The fading chances of a December rate hike will probably support gold prices till the end of this year. This would then reverse in the second quarter next year, when year-on-year growth in oil prices will be flat, resulting in real interest rates moving into positive territory, said Mr Gordon.
The bullish outlook for gold, however, assumes that financial markets don't move into extreme disarray.
When such events happen, liquidity is prized above all else, and gold prices move lower, said ABN Amro forex and precious metals analyst Georgette Boele.
This occurred at the height of the Great Financial Crisis, which saw the US dollar and the yen, being the most liquid financial markets, benefiting the most.
"If eurozone break-up fears were truly to mount, leading to a risk-off mode that affects liquidity, gold prices are likely to peak again before the climax of the crisis," she said. "Then the yen and the US dollar could strongly outperform gold."
Barring such a doomsday scenario, gold, already one of the best performing commodities this year after three years of losses, could very well continue to glitter till the end of the year.
This article was first published on July 5, 2016.
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