another good read
https://www.miningweekly.co.za/min/news/today/?show=70049
Precious-metals 'demand shock' possible - economist
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For the past three years gold has marched in lockstep with the dollar.
As the dollar weakened, at first due to declining US interest rates, and later from fear of growing imbalances, the gold price rose in dollar terms, FNB chief economist Dr Cees Bruggemans writes this week in his 'Weekly Comment' article.
However, the gold price hardly changed in euro terms, which, he says, indicates a certain 'aloofness' to global affairs.
Over the past two months, however, this pattern has changed.
While the dollar has strengthened and Europe's political and economic attractiveness has suffered, gold did not ease off in dollar terms, remaining neutral in euro terms, as was to be expected on past performance.
Instead, gold regained its best dollar level of $440/oz and has risen against the sinking Euro, Bruggemans writes.
He concludes that, “something seems to have changed the market view of gold's value” although it is difficult to discern what factors are driving the physical gold price at the specific moment.
Bruggemans mentions jewellery and industrial demand as being influencing factors, but suggests that, as a financial insurance instrument, gold's role appears dormant at present.
Further, he questions whether gold could be experiencing a 'demand' shock, like many other commodities, such as oil, coal, iron-ore, copper and others as a result of steeply-rising Chinese (and Indian) demand.
Such a physical explanation for the sudden gain in the 'real' gold price sounds plausible, except that this Asian factor has been building up in other commodities for some three years, without registering at all the gold price, says Bruggemans.
Nonetheless, he warns that a 'demand' shock may still well loom for precious metals, as much as it appears to be affecting other commodities, at least until supply catches up.
He suggests that a more likely explanation for gold's sudden liveliness in the short-term, however, is its old role as a store of value of last resort in uncertain times.
”Global bond yields may be eroding and inflation expectations contained, with some lingering concern about global deflation - not a gold-friendly environment.
”But the fact of the matter remains that this is taking place against the strangest of backgrounds, in which global imbalances are steadily expanding.” He goes on to pose the question whether the market is seeing the return of risk aversion, observable in wider corporate (and emerging) bond spreads, as well as the 'slight tremor' in real precious-metal prices.
Global trade is being restricted by policy measures that are actually damaging to global economic progress and, while the dollar may have gained value in the short term, the global imbalances continue to expand unchecked.
Bruggemans says that, unless this is tackled through positive economic growth, the only other route would be significant currency changes, which would be potentially damaging in the long haul.
Bruggemans writes that, although rising commodity prices are not generally seen as a global inflation threat, at least its energy component is viewed by many (especially in global bond markets) as a tax on global income with considerable deflationary potential in a low-interest-rate environment.
Any small change in global risk-aversion sentiment would also register in the gold price, as the physical gold stock is small, perhaps worth $1-trillion, compared to $50 trillion of private US wealth, and perhaps four to five times that globally.
If the shifts outlined by Bruggemans are valid, then he says that, global imbalances still expected to widen, currency volatility likely to deepen, and commodity prices to become yet more roguish, there is potentially room for a precious-metal demand 'shock', although he believes its origin may be global and financial rather than based on Asian factors.
For South Africa, as a key precious-metal producer, such developments in precious-metals prices would have significant implications, which would be registered in national income, the value of the exchange rate, interest rates, asset markets, and the manner this would influence confidence, fixed investment and consumption.
”It remains to be seen whether we are only imagining a trend break in precious metal price relationships or whether something deeper is really stirring.
It certainly would have major implications for us if it turned out to be for real,” Bruggemans concludes.