Some analysts have been recently speculating that gold might have hit a medium-term bottom (or, at least, near to it), and projected to increase over the next several quarters. Let’s have a look at some of the reasons that have been given.
Strong central bank gold purchases
According to World Gold Council statistics, central banks have bought 8% more gold in the first half of the year than last year, and the most since 2015. While it’s normal for central banks to stock up on gold when the price is low (it was at 19-month lows in August), analysts point to the buyer being more out of concern over trade disputes and Brexit. With those two issues largely still unresolved, central banks might not be interested in cutting their buying even as the price recovers.
Safe haven flows have boosted the dollar in recent months, and with the tripartite agreement in North America, some of that dollar strength might be sapped in favor of gold. This matches with what WGC analysts pointed out in their September note, regarding “the desire by some countries to dedollarize in response to political motivations and changing global trade patterns.”
Mining Sector Consolidation
US Global Investors analysts have pointed to the recent merger agreement between Randgold Resources and Barrick Gold, indicating that historically this kind of consolidations is seen near the bottom of the market. Additionally, analysts at Sprott contend that this is likely the first in a spate of further industry consolidation. Gold mining stocks are at the cheapest relative to the S&P500 in nearly two decades, which would further spur investment in the sector.
Industrial consolidation brings more efficiency through economies of scale, but also reduces competition and can have long-term positive price pressures. Companies might consider shuttering higher-cost facilities, cutting supply and supporting the price.
On that note, we shouldn’t forget that about half the world’s bullion has been mined in South Africa, with companies there working in some of the deepest, most dangerous mines in the world – and, as a consequence, most expensive. Analysts have been pointing out for several years that infrastructure investment in South African mines has been less than ideal – and significant more investment might be needed to get at increasingly deeper veins, further increasing production costs which are already among the highest in the world.
Analysts are in disagreement with the longer-term trajectory of the dollar. Some point to the tightening policy of the Fed as broadly supportive of the greenback (in detriment to gold), but others say the Fed is close to scaling back its balance sheet reduction potentially weakening the dollar.
According to data compiled by Dow Jones since 1990, October has traditionally marked a decrease in the price of gold. Analysts often refer to a tendency of gold to increase in the lead-up to year end, as consumers buy for the holidays. Also, October coincides with the second of China’s golden weeks, prompting high consumer demand for Chinese households, who will spend on travel instead of buying gold as a saving.
However, data shows that US trade tariffs are impacting the Chinese economy, and that might curb enthusiasm for gold in the largest retail market in the world. On the other hand, the end of October hosts the Indian festival of Diwali, seen as the start of the country’s wedding season which usually includes significant purchases of gold.
Finally, another factor that is often overlooked by traders is seen in a report by Bloomberg showing that mining companies are having increasing difficulty finding new reserves. Between 2006 and 2016 new gold finds dropped by 85%, and without a new significant find, expectations of a limit on the amount of available gold could put upward price pressure on the metal.