Gold: Best Quarter in 30 Years
Yesterday marked the close of the first quarter in 2016 in which the 3 C’s (Commodities, China and Central banks) were in focus. Among the winners in financial markets is gold. After the very weak 2015, gold came back to 1’235 USD per ounce and climbed almost 17% in the first 3 months of this year, its biggest quarterly rise since 1986.
Here are the 4 main-drivers for the recent rally in gold:
- low interest rates
- security concerns
- a weak Dollar
- a low supply
By far the most important factor is the level of interest rates. And it’s not hard to predict, that these low – and in Europe and Japan even negative – rates will be around for quite some time to come.
Even the generally expected 4 rate hikes by the US-Federal Reserve in 2016 are most likely off the table, because Fed-Chair Janet Yellen became cautious about it. At a speech at the Economic Club of New York a few days ago, she indicated, that with the weak global economy, a rate adjustment ‘may have to wait until later this year’.
The level of interest rates is important for the price of gold, because the metal itself is a so called ‘non-yielding asset’ (since you don’t get an interest for gold) that translates into lower opportunity costs when rates are falling and vice versa.
The combination of the current low opportunity costs for gold with the metal’s other quality as a safe-haven – in light of worries about China’s economy or geopolitical concerns for instance – and the fact, that gold cannot be printed like paper money, makes gold very attractive as an alternative investment. Finally, the rally in gold prices has also been supported by an unexpected weak US-Dollar and a reduction in availability. According to the World Gold Council, the total gold-supply last year declined to 4’258 tons – that’s the lowest supply since 2009.
And the chances are quite good, that the rise in gold will continue throughout 2016 to levels of 1300 to 1350 USD per ounce. In case you are considering an investment: You’re late, but not too late. When investing in gold, you can basically choose between ‘paper gold‘ and physical gold. If you prefer ‘paper gold’ then Gold mining stocks and gold ETF’s are in play. If want to buy physical gold, then you may choose between ‘Bullions’ and ‘Coins’.
It’s the same gold-price, but there are still differences in the performance between paper- and physical gold. Historically, mining stocks have outperformed physical gold during periods of rising global business activity, where they can benefit from the stronger performance of equities generally. In times of economic contraction, physical gold is performing better than gold-stocks, because with mining-shares you’re not just exposed to the gold price, but also on the business risks as the exploration risk for instance.
As outlined before (click here ), I clearly prefer physical gold over paper gold, because I see gold as a hedge against market turbulences and the central banks tireless printing of new paper money. And physical gold is easy to buy, while picking the best mining stocks requires some research and you’re still exposed to the – unforeseeable – business risk.
If you buy physical gold online, compare prices and VAT (TVA). Throughout the EU, investment-grade gold bullion and certain approved coins are exempt from VAT as they are considered an investment vehicle whereas for instance silver bullions are subject to VAT and rates vary from country to country.
Low interest rates, security concerns, a weak USD and a lower supply – the 1st quarter of 2016 was the best for gold in the last 30 years