Fresh multi-year highs
So far, 2016 has been a great year for goldbugs. The Midas metal has already climbed more than
25% since January, with an impressive rally which shows no signs of slowing down.
After starting the year at its lowest level against the US dollar since 2009, the price of gold has
shot up from around $1,060 to over $1,350 at the time of writing.
It’s been more than two years since the precious yellow metal has been trading at
Looking at the weekly price chart below, it’s easy to spot the long-term descending wedge
formation which gold had been trading in from the middle of 2013. It’s also clear to see just how
much it rocketed higher at the start of 2016, breaking through a key level of resistance in
What’s driving the rally?
There are a number of different situations which can drive a surge in the price of gold, but over
the last 12 months or so we’ve seen four key catalysts come together to create the perfect
environment for a gold rush…
1.) Global economic uncertainty
Gold is considered to be a ‘safe-haven asset’ by many investors. Throughout history it’s been
viewed as a traditional store of value, offering protection against the effects of inflation and
turbulence in the markets. There’s only a finite amount of gold in the world and, unlike fiat
currencies, governments just can’t go around printing more when times get tough.
2.) Lower bond yields
Another reason behind gold’s meteoric recent rise has been the historically low yields we’ve been
seeing across the global bond market. US Treasury bond yields are nearing an all-time record low,
with both German and Japanese 10-year bonds actually returning a negative yield. Investors are
currently paying 17 and 28 basis points-per-year respectively to these countries for the privilege of
holding their paper.
This kind of scenario lowers the ‘opportunity cost’ of owning gold, which in turn increases its
appeal. Although gold is a non-yielding commodity, when the alternative is a non-yielding (or even
negatively yielding) interest-based asset, it starts to look like a far more attractive option, with
better growth prospects over time.
3.) An increase in demand
Of course, good old fashioned supply and demand dynamics also play a key role in determining the
price of gold. Over the last six months we’ve seen a significant rise in global buyers of bullion,
particularly from the East. Demand in India and China, the world’s two largest consumers of gold,
has bounced back significantly after a drop-off in recent years.
Central Banks have been hefty buyers of gold too recently. Over the last six months they snapped
up near-record levels of the stuff. In contrast, production levels have actually remained depressed;
many high-cost gold mines are still offline, having been mothballed as a result of the longer-term
fall in prices since 2011’s all-time high.
4.) A weaker US dollar
Since gold is always priced in US dollars, the weaker this currency becomes, the more dollars it
takes to buy each ounce of gold. In other words, its relative value increases. Since the start of this
year, the US dollar index has dropped significantly, pulled lower by economic data suggesting the
US economy isn’t as healthy as previously thought. This dollar weakness has been another factor
helping to push up the price of gold.
It’s worth taking a closer look at just how much of an effect the UK’s EU Referendum has had on
global gold prices this year. I’ve already touched on how uncertainty surrounding the vote helped
precious metals to rally higher. This began to impact prices well in advance of June 23rd, steadily
gathering momentum as the big day drew closer. But what happened when the results were finally
announced took the markets by storm…
On Friday 24th June, when Britain revealed its Brexit decision, the price of gold shot up
by more than 8% in early trading – its biggest intraday jump since 2008.
Over the course of that day, risk-averse investors pumped an incredible $4.3 billion into goldbacked
funds and, according to the U.S. Commodity Futures Trading Commission, net-long
positions in gold futures rose by 6.7% to 256,898 contracts. That’s the highest level since records
Can it keep on climbing?
Of course, the most import question now is: where will gold head from here? Whilst no one can
say for certain, it looks likely that the current upwards momentum should continue to carry prices
higher for some time to come.
The driving fundamentals behind this year’s rally are unlikely to change anytime soon.
Uncertainty will continue to cast a dark shadow over the markets as Britain makes its exit from the
EU. We’re entering unchartered territory here and it’s impossible to predict the potentially farreaching
economic consequences. Let’s be honest, even before Brexit, Europe was already facing
some pretty big problems, with Greece, Italy and Portugal all drowning in debt.
It doesn’t look as though bond yields are going to start climbing anytime soon either. In fact,
experts are predicting that more government debt is going to enter negative territory in the near
future, with the 10-year yields on sovereign debt in Denmark and the Netherlands both very close
to falling below zero. When the alternative is earning nothing on your cash, or even paying the
government to lend it, gold should continue to hold its appeal.
If you are bullish on gold, then you’re certainly in good company. In May billionaire
investor George Soros bought a $264 million stake in the world’s largest gold
producer, Barrick Gold Corp.
Plenty of other high-profile fund managers have also been piling into gold, including Stanley
Druckenmiller. He recently told investors to buy the yellow metal due to his concerns about China’s
economy and the Fed’s ‘easy money policies’.
Golden buying opportunities
There are a number of different ways to invest in gold, including physical bullion, exchange-trade
funds and futures contracts. You could also buy shares in gold miners. Although this is quite
different from buying the commodity itself, the financial performance of these firms still depend on
the price of gold. These companies generally derive their profit by taking advantage of the spread
between gold prices and the cost of mining.
1.) Randgold Resources (RRS)
Shares in FTSE 100 giant Randgold have already more than doubled since the start of 2016, but
given their strong upwards momentum they should have much further to go. It’s an extremely
well-run business, often referred to as ‘the best gold miner in the world’, and has one of the lowest
cost bases too, with overheads of around $600 per ounce. The recent share price pullback over the
last week or so could offer investors a good entry point too…
2.) Centamin (CEY)
This Egyptian mid-cap miner has also already performed very well so far this year, but could offer
significant further upside. Like Randgold, it operates with low production costs. These dropped
from $912 to $855 per ounce in 2015, providing plenty of headroom should the price of gold
retreat. With $234 million held in cash and bullion, its balance sheet is in great shape too and even
after the recent rally it’s still trading at a big discount to its peers.
3.) Petropavlosk (POG)
The price chart of Petropavlosk looks quite different from our other two recommendations and for
good reason too. As well as a bet on the price of gold, this penny share is also a recovery play and
as such offers greater profit potential, albeit with higher risk. The company borrowed heavily to
fund expansion at the start of this decade, but got caught out by a downturn in the price of gold.
Its shares plummeted from 420p in 2010 to around 2p in 2014. However, thanks to a dramatic
rights issue and several well timed deals it now appears to be staging an impressive comeback…