Gold Still on A Long-Term Track to Reach $2,000 An Ounce
The comments below are an edited and abridged synopsis of an article by Myra Saefong
Gold has pulled back from a 10-month high, leaving investors wondering why the many geopolitical and economic issues plaguing the market haven’t been able to fully support the metal’s haven appeal.
Gold made a multi-month peak on uncertainty linked to Brexit, the US-China trade dispute, and global economic growth. But prices suffered a loss on the heels of four monthly gains, the longest upward streak since 2016.
Gold still faces supply challenges and any uptick in demand would tighten inventories.
The gold mining sector has seen a spate of merger and acquisition activity, most recently with Barrick Gold’s unsolicited proposal to buy Newmont Mining Corp. in a deal that values Newmont at nearly $18 billion.
M&A activity reflects the increasing difficulty in finding and mining gold reserves. The consolidation of the gold-mining sector highlights existing gold supply difficulties and shortages, which is supportive of gold prices.
On the demand side, central banks have been buying gold, lifting 2018 net purchases to 651.5 tonnes, their highest in more than 50 years, as geopolitical uncertainty and economic worries prompted national banks to diversify.
“Central bank choices about composition of their reserves send important signals to financial markets about relative safety of currency alternatives,” said Trey Reik of Sprott Physical Gold Trust. “Whenever gold allocations are on the rise, central bank authority is augmenting the [money-like qualities] of gold.”
Central banks have been net buyers of gold since 2010. Almost one-fifth of central banks signaled their intention to raise gold purchases over the next 12 months.
“Central bank buying is quite bullish as they are massive institutional players…and even a small allocation to gold can be quite significant in terms of additional physical demand,” said Mark O’Byrne of GoldCore.
“Official sector gold buying does not imply necessarily that [central banks] are bullish on gold per se… It likely means that they are concerned regarding the outlook for the dollar and are reducing and hedging exposures in this regard.”
