The Gold price had a spectacular rally of 18% in less than two months from $1,050 to $1,240. Yesterday’s $40 move made everybody take note.
Let’s take a step back and look at the World Gold Council’s (WGC) statistics for the 4th quarter of 2015 that were published yesterday.
- After declines in the first half-year, gold demand picked up in the second half.
- Total Gold demand increased by 4% in Q4 2015 v Q4 2014.
- Although outflows from gold-backed ETFs continued, it slowed in 2015. Bar and coin demand increased slightly as the decline in India was offset by strong demand in China, up 21%. The Yuan’s devaluation in Q4 resulted in Chinese investors seeking a safe haven.
- The biggest increase in demand however came from Central Banks, up 25% to 167 tonnes in Q4.
- On the supply side, mine production declined for the first time in years and recycling continued to decline as the low prices did not tempt consumers to sell.
- An increase in demand coupled with a decline in supply can only lead to one thing, higher prices. That is economics 101.
- What is significant is that the increase in demand was caused by higher investment demand and Central Bank buying. Some may remember the ‘90s when Central Bank selling was capped to prevent a total collapse in the Gold Price. Gold still went from $850 in 1980 to $250 in 1999. After the financial crisis of 2008, Gold hit a high of $1,800 in 2011 as investors and Central Banks piled into Gold as a safe haven.
- When investors and Central Banks seek Gold as a safe haven to the extent we saw in the last two months, there is something seriously wrong in the World’s financial system. The same can be said for the flight to US Government Bonds as another safe haven. With yields on their Bonds so low, 1.5%, the opportunity cost of holding Gold as an alternative is very low.
- The huge decline in Banking shares all over the globe is further confirmation of problems in financial systems.
- I think our Banking shares are pulled down by global problems that will not affect their profits and dividends. With a long-term view the yields look very attractive. With a dividend yield of around 6% on Nedbank and Standard Bank a long-term investor can wait a loooong time for capital appreciation as our Banks’ dividends are unlikely to be cut.
- This is however a time to be careful, not aggressive.
Head – Sanlam iTrade Online