U.S-China trade tensions and other concerns about the global economy have driven the price of gold above six-year highs as gold miners look to take advantage against a backdrop of limited supply.
After several years of oscillating through a range of prices of around US$1,100 per ounce to just over US$1,300/oz, COMEX Gold Futures started steadily marching upward in recent weeks and cracked US$1,500/oz on Aug. 7. Concerns about the economy and global trade will likely keep upward pressure on gold prices, analysts and executives at gold companies have been telling investors in recent weeks.
"With bond yields falling sharply due to the negative impact on economic growth prospects, we will see real yields continuing to fall," said Richard Perry, a market analyst with London-based Hantec Markets Ltd. "With a negative correlation between real yields and gold, this will underpin further upside on gold in the coming months."
How the ongoing trade dispute between the U.S. and China proceeds will be key to the future direction of gold markets as an increasingly dovish outlook on monetary policy coming from the Federal Reserve's Federal Open Market Committee pulls real yields lower, Perry said. Gold will likely perform well as the U.S. dollar struggles for traction in such an environment, the analyst added.
"Falling inflation, and renewed dovish monetary policy from major central banks will help to drive gold higher," Perry said. "Ultimately, though, it is the development of the U.S./China trade dispute to its end game (all-out trade war) which will be the signal for an end to the gold bull run. Until then, central banks will be in a race to the bottom on rates and this will sustain appetite to buy gold."
Kristoffer Inton, director of basic materials research at Morningstar Inc., was quoted in a July 30 email suggesting that the market for gold is pricing in a scenario of low to negative real interest rates from a weak economy that necessitates rate cuts. However, at the same time, the market is pricing in typical inflation that comes with a healthy economy, and those are "scenarios that appear unlikely to occur simultaneously."
"All else equal, the turn in the Fed's sentiment on the target rate has restored the attractiveness of investment demand for gold, a sharp turn from the trend during the last few years," Inton said. "Gold exchange-traded funds have seen inflows in recent months, as the Federal Open Market Committee's return to rate cuts have fueled gold's resurgence."
A wave of consolidations including the formation of Newmont Goldcorp Corp. and the US$18 billion merger of Barrick Gold Corp. and Randgold Resources Ltd. has reshaped a sector that remains open to potential mergers and acquisitions. In the wake of recent consolidation, larger producers reported rising gold production in the first quarter, an S&P Global Market Intelligence analysis showed.
"High gold prices could not have come at a better time," Franco-Nevada Corp. President and COO Paul Brink said on an Aug. 8 earnings call.
Osisko Gold Royalties Ltd. President Bryan Coates said his company was well-positioned to take advantage as the industry is "getting into a very good gold market."
"This gold price, we believe, will continue to be strong given that we believe the U.S. dollar will weaken and the high debt levels," Coates said on an Aug. 1 earnings call. "If you add a little bit of geopolitical tension, it has all good ingredients to reach record highs again."
The price rise is being driven by both supply and demand concerns. Toronto-based Teranga Gold Corp. CEO Richard Young noted on a recent earnings call that in addition to rising demand, global mine supply is challenged as reserves are declining. Barrick CEO Mark Bristow reported a similar sentiment and added that his company's vision is to control the majority of the industry's tier-one assets.
"Creating value, as I've said many times before, is all about being sustainably profitable," Bristow said during an Aug. 12 call. "To do that as a gold miner, one has to invest in profitable products as well as replacing the gold we mined. We as an industry, as you all know, have not done this very well. And as a result, the outlook of new global gold production is now declining."