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Gold lost its shine today, Should You Buy on the Dip?

Gold has started 2016 on an impressive note as the yellow metal leaves equities in the dust with impressive gains. In the year-to-date period, gold has gained more than 12% to erase the 10% losses that it recorded in 2015. In contrast, U.S equities have been struggling as the major market indices alternate between daily trading losses and daily trading gains. The uptrend in gold has caused investors to move to the buy-side and gold is probably the best-performing asset class in the market.

The safe-haven status of gold has been strengthened by the sustained weakness in the equity markets as Federal Banks move towards negative/zero interest rates. You’ll remember that gold suffered in 2015 after the U.S. Federal Reserve had made it clear that it intended to raise interest rates. Now, the Fed is not sure that the U.S economy is strong enough to withstand further rate hikes; in fact, the Fed might start to consider negative interest rates.

Gold is weak today

Reuters report that gold gave back some of the gains from last week as it retraced its footsteps by more than 2% this morning as stocks showed a rebound in European markets. This morning in London, spot gold was down 2.3% at $1,209.80 an ounce and U.S. gold for April delivery was down 2.3% to $1,210.90. In addition, the fact that U.S. markets are closed today has reduced the number of people that could be on the buy side for the yellow metal.

The weakness in gold can be traced to a rebound in stocks in Europe and Asia. For instance, in Europe UK’s FTSE 100 made gains of 2.16%, Euro Stoxx 50 recorded 3.24% in gains, and France’s CAC 40 was up 3.51%. The situation is also impressive in Asia as Japan’s Nikkei 225 gained 7.16% after losing almost 10% last week after the Bank of Japan slashed interest rates. Hong Kong’s Hang seng was up 3.27% but China’s Shanghai is down 0.63%.

Simona Gambarini, an analyst at Capital Economics provides some insight into why gold is down today. In her words, “we’re not surprised by the correction… Gold is probably going to fall further if the situation improves in global equity markets. If the panic subsides, it is probably going to fall to $1,150… It was actually quite positive that gold behaved like a safe haven again, and that showed that in times when there is a lot of volatility in equity markets, gold is benefiting from that.”

Is gold attractive enough for you?

There’s no doubt that gold has outperformed equities, bonds, real estate, and other precious metals as it embarks on its best start to the year since 1980. John Hathaway, co-portfolio manager at the Tocqueville Gold Fund with over $800m under management thinks that the consistently uncertain environment of interest rates globally has caused investors to seek refuge in gold.

In his words, “What’s going to sustain it [gold] is a loss of confidence in central banking which is just starting… “What’s going to drive that is falling stocks. Zero interest rates for all these years has pushed up the valuation of a lot of garbage.”

However, it appears that the gains recorded by gold can mostly be traced to increased buy action on gold-backed ETFs. The fact that many investors are running to gold-backed ETFs such as Direxion Shares Exchange Traded Fund Trust has propped up the bullish case for gold. According to HSBC “previous periods of accumulation were dominated by North American buyers but purchases this year are more evenly distributed globally… This supports the rally.”

However, it remains to be seen if the bullish prospects of gold will attract buyers to buy physical gold. India and China has the largest number of buyers who buy physical gold. In fact, World Gold Council posits that Indian and Chinese buyers account for 45% of the global demand for gold. However, the weakness in the Asian markets suggests that we might not see increased demand for physical gold any time soon.

 

 

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