Commodities – what’s the outlook for gold prices as markets head into the second half of the year?

After touching on lows of $1,056 at the end of 2015, gold prices have been the standout performer in 2016.

Year-to-date gains of around 20% point to a bull market for the precious metal, which is now flirting with key resistance around $1,300.

Can it break through this level or has gold run its race this year?

Gold_bullion_20dollarbill

Bull Rally

 

Gold bulls have well and truly got a grip on the market. But why has gold been on a tear? While stocks slipped in the first six weeks of 2016 in a decidedly risk-off mood, the S&P 500 is close to record highs again.

Risk is back in – oil prices have bounced 50% from their February trough – which ought to be bad for gold.

Nevertheless there are fears about the health of the global economy, as evidenced by the cautious approach taken by the Federal Reserve.

A relatively dovish Fed has been an important factor for gold – low interest rates make the metal more appealing. Higher rates dampen demand as gold yields nothing. The weak May jobs report all but killed off a rate rise by the Fed on June 15th, exciting a revival for gold bulls.

It’s not just the Fed – low interest rates around the developed world makes gold much more appealing as a store of value.

We now have a $10 trillion pile of negative yielding government bonds – which Janus Capital’s Bill Gross likens to a ”supernova that will explode one day”. This costs investors money and is forcing them to accept longer-dated paper, or opt for riskier bets. Or, invest in gold as a store of value – better to yield nothing than accept a negative yield.

“Low interest rates are a powerful propeller for higher gold and while US rates are the main focus of the gold market, global rates are also a factor driving gold prices,” Kitco quoted HSBC analysts as saying.

Among the many risks to the global economy that may support gold prices, the threat of Britain leaving the European Union. Whether there is enough in this to be sustained for very long is another matter. 

Investor Bets

 

ANZ analysts are pointing to gold returning to $1,400, according to a CNBC report. Meanwhile George Soros, the notorious trader who made a fortune betting against the pound, is now piling into bearish bets, including going long on gold, the Wall Street Journal reported.

Soros sees the potential breakup of the EU and a financial crash in China as two risks that make gold attractive. His family-owned Soros Fund Management is now “aggressively” long gold and short on stocks.

Hedge funds are also long gold. According to data filed at The Commodity Futures Trading Commission, net bullish positions are up 20% in gold derivatives as managed money investors slashed shorts and piled into more longs.

Bloomberg data shows holdings in gold-backed exchange-traded funds (ETFs) rose 6.51 tonnes to 1,873.8ts by Friday June 10th, the most since November 2013.

Added market volatility means increased opportunity but also more risk. To reflect this, ETX Capital may be increasing margin rates on certain markets.