Conversations about Gold

This is Gold is about bringing the industry to life. In this section we feature Conversations about Gold – which highlights key discussions about the industry, People of Gold – which introduces some of the most vibrant and interesting people in the industry, and Places of Gold – which shows the mines that keep the industry going.

Warning against safe haven gold? Rhona O’Connell takes the long view

A recent media report quoted Russ Koestrich, chief investment strategist at US fund manager BlackRock, saying that “safe-haven” investments such as gold could be vulnerable to rising US interest rates.  

It is important to put this issue into context, however. Mr Koestrich’s argument is based on the perspective that rising US interest rates will likely lead to a stronger dollar. A stronger dollar typically means a weaker gold price (they’re inversely correlated), so prices could weaken.

Rhona O’Connell, head of Metals Research and Forecasts at the GFMS Team at Thomson Reuters, takes a longer view.

She argues that, based on supply-demand fundamentals alone, gold may face a difficult six to eight months, but soon after that we could see the start of another cyclical bull market.

Bullion banks shipped an estimated 1,495 tonnes of gold into China alone in 2013. While that was a large level by historical standards, demand remained reasonably firm through to January 2014. Since then, however, some of the larger-than-normal amounts of gold bought in the preceding months may have created a drag on bullion prices. In the principal countries of South East Asia – Indonesia and Thailand – the physical market has been broadly in balance. And much the same has been the case in the OTC (over-the-counter) market in the US and Europe.

Looking out beyond two years she sees a flat supply-side profile. The world’s gold miners have recently been try to conserve cash through, among other things, cutting back spending on exploration or brownfields mine development. Scrap deliveries, which peaked in 2009, are showing no signs of an imminent increase.

She believes the price will bottom out sometime next year after which demographics will come into play, placing the market firmly in the grip of a supply-demand deficit. That’s when money will start to return to the gold market.

There is another, potentially more bullish factor overlaying the outlook, though. As the EU begins to escape its economic lethargy and growth returns in tandem with the US and China, we could well start seeing the emergence of another factor – fear of inflation. When economies start growing and consumer demand starts to rise, the massive liquidity pumped into the system since the Global Economic Crisis by the US Federal Reserve, by so-called Abenomics in Japan and now by the European Central Bank to get economies back on track will be threatening to bring back inflation. And that can only be supportive of gold as a safe-haven investment.