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The gold sector had an exceptionally robust first quarter this year.  The considerable increase in safe haven demand has resulted from the US Federal Reserve announcement that it would include negative interest rate stress tests for US banks. This triggered a flight to safety scenario should global economic conditions deteriorate. In short, golds recovery is clearly linked to the rapidly diminishing level of faith that investors and private citizens around the world have in Central Banks.

Plenty of pundits old and new are now very firmly favouring the bullish case for gold.

There are literally volumes written daily on events influencing the gold price in relation to the Fed, the Dow to gold ratio, China, Russia, India, Switzerland all pertaining to global debt fears and systemic failure of the financial system, more QE easy money policies, currency wars, pegs and bank runs stemming from negative interest rates

In truth no one can confidently or accurately predict the outcome of what in recent years has been an unprecedented period of financial turmoil and economic instability. What is abundantly clear however, is that major gold mining CEO’s, Wall Street Hedge Fund magnates, famous financial billionaires and their like are all collectively jumping on the bandwagon and extolling the virtues of gold and backing this up by placing big bets on a substantially higher gold price in the near and longer term. Central Banks everywhere and Exchange Traded Funds remain the biggest buyers while there is no let-up in demand by private citizens, family offices and sovereign wealth funds. Gold and silver coin supplies have also been exhausted. In one instance a well-known major gold equities fund had to turn new retail investors away because it couldn’t (temporarily) meet the stampede for its product at the time.

Summer marks a different trading phase in gold markets, and Patience is required to trade it effectively. Gold prices fluctuate very seasonally, and one needs to trust 15 years of data and fight the urge to take refuge, from May’s 5% fall. It bottoms in March and June, and peaks in May and October. The consistent seasonality of gold created the phrase “sell in May and go away”. Gold weakened during May by about $100, from an intraday trading high point of $1300 to a low of $1200. This, for technical analysts, is entirely within the normal correction zone of a third to two-thirds of the previous rise, which would be 84 to 167 points. So the fall is technically reasonable, and doesn’t in itself signify any underlying challenge to the merits of a long position in gold. The TC Peterhouse Gold & Precious Metals Fund investment plan was ready for this, and is positioned with good value stocks that have maintained the majority of their gains, and is poised to take advantage of summer weakness to build positions and exploit price weakness.

gold blog pic

Short Term, Gold and gold stocks may correct and rest for the summer, with lower prices and low volumes except where something newsworthy happens. The seasonal low traditionally happens in June. The consensus expectation of a June rate rise, has pushed the price down, and may keep it down over the summer, although there is good resistance at 1200, with Brexit being the being the wild card. Contrary to popular belief the dollar index is not trade weighted, or frankly even trade reflective. The dollar index is 56.7 percent weighted in Euro, and 11.9% weighted in Pounds. If Britain votes in, as the polls suggest, there is likely to be a ~5% appreciation in both the Euro and the Pound, as an out vote is a serious threat to both economies. With ~70% of the DXY reliant on them you will see a corresponding weakness in the dollar. That is good for gold. Conversely if there is an out vote, both currencies will be weak relative to the dollar and whether gold goes up on uncertainty or down on the dollar is at best uncertain.

Fundamentally the macro picture says that gold will go up in the medium to long term, we fundamentally believe gold is 5 months into a 3-5year secular bull market trend and nothing that has happened recently has changed that perception.  While Chinese and Indian retail gold buying is down by a nominal amount, (retail is price sensitive when prices go up they buy less), the macro picture is that Chinese and Russian Central bank buying is up this year, as are global ETF’s, and those are the numbers to be looking at as they underpin central demand growth in gold. Last but not least Gold as a safe haven is very real today. People are fundamentally more worried today about where their money is going to be safe.  There is a Greek depression, the RMB has devalued, Venezuela is on the verge of default, and Japanese Prime Minister Abe is warning the G-7 of a Lehman brothers like global financial crisis.  ISIS was only deterred by the Russians bombing Syria but the instability and refugee crisis continues with no end in sight. The US and China are going head to head over islands in the South China sea. Brexit is threatening the already unstable Eurozone. And last but not least Mr. Trump looks to be about to create the largest upset in the political status quo in 100 years in the US. The Western Fed’s toolboxes are exhausted and after unprecedented amounts of QE and zero interest policies throughout the West, we have not fundamentally been able significantly boost productivity or growth, and to cap it all, Chinese growth, which for the last 8 years is what has kept the global economy afloat is a huge question mark.

Quantitative Easing has led to a US money supply that has increased 13 fold since 2007, in the form of US debt, the only way to pay that back is via inflating it away. The effective short term rate today is 0.37%, the lowest it has ever been. Over the last 50 years the rate averaged about 4% and it has been volatile never staying in one position for more than a year or so let alone the steady rate it has been for the last 8 years. Notable lows are 2008-2016 0-0.25% in the aftermath of the Lehman financial crisis, 0.63% in 1958, and 1% in 2003.  Notable highs, 9.2% August 1969, 12.9% 1974, and 19% 1981. While going to 0.75% or 1% seems huge after 8 years of low rates, this rate change will do nothing to fundamentally change the economic picture in the US or the world.  Gold always wobbles in the short term before rate rises, but the proposed rate rise is not enough to change the negative real rates of return as it affects the gold price. Put simply people are not going to pile into US treasuries to get 1% returns, especially if the fundamental value of the dollar is in question.

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