Stay Invested In Precious Metals And Hedge Against Uncertainities

Is Gold & Silver still good investment in current economic environment?

After two and a half years of correction, gold prices have shot up during the year 2016 and it’s one of the best performing asset classes in the year 2016 so far up by 20% from the start of the year. During the last two years investment demand have remained subdued on account of tapering of U.S. bond purchase  program & expectation of impending rate hike by the Federal Reserve which had led to stronger dollar, which was discounted during the year 2015 where gold prices had remained under pressure throughout the year. But after the rate hike in December 2015 when the Federal Reserve, we have seen complete divergence in monetary policy in developed world, Eurozone and Japan cut their interest rate further. Negative interest rate in many countries led to spike in gold prices, also due to slowdown in emerging market and deteriorating global economy in February and March meeting the Federal Reserve indicated no aggressive rate hike lead to, increasing the appeal of non-interest bearing assets such as gold.

US 10 year real yields are the primary driver of gold prices

The long term driver of gold prices is the path of US 10 year real yields. US 10 year real yields have turned more negative, gold prices have tracked higher. A higher US dollar will also drive gold prices lower, but this relationship has historically been less consistent than US 10 year real yields.

Bond markets are gold’s connection to the Federal Open Market Committee‘s (FOMC) interest rate projections. A higher fed funds rate, with all else held equal, should see US 10 year real yields drift higher. In turn, this should see gold prices trend lower, so in case if FOMC will lift the fed funds rate in June and later then Gold prices can correct during that time but we can’t expect any aggressive rate hike from the Fed so after the correction, gold prices may again start moving higher as global growth have still remain sluggish. Some of the emerging markets have stabilized after facing massive sell off but uncertainty still remains so we expect maximum one rate hike for the year instead of six expected in December 2015. US 10 year real yields may already be pricing in increases to the fed funds rate. This means US 10 year real yields may not move that much higher if the FOMC lifts interest rates, which suggests that gold prices may not move that much lower either. But if US inflation expectations fall, the resulting lifts in US 10 year real yields will weigh on gold prices. With sharp up move in crude oil prices deflationary threats have receded so likelihood of fall in inflation is less. 

Gold demand and supply

The supply scenario - The supply scenario had a bit different story. The overall supply from mines and the scraped/recycled gold have declined during the year 2015 and the supply constraint will remain for the current year as well. The overall demand and supply trend remained tight in 2015 and with rebound in investment demand this year tightness in supply will be witnessed and premium will widen in physical market. 

Investment demand of Gold has shot up in the first quarter of 2016. The ETF’s holding in SPDR’s gold back exchange traded funds increased around 176.90 tonnes in Q 1 of 2016. Countries in which negative rates persist had witnessed sharp surge in investment demand and resulted in sharp inflow in Gold ETF’s. Physical demand from India & China remain subdued so investment demand was the major driving force behind Gold’s rally

Silver:

Silver too look interesting proposition as Global mine supply production of silver is projected to fall in 2016 by as much as 5 percent year-on-year. This would represent the first reduction to global silver mine production since 2002. Lower prices in 2015 have discouraged silver miners to invest in capacity expansion. Silver industrial demand, is liked to increase its share of total demand in 2016. In 2015, industrial fabrication demand accounted for an estimated 54 percent of total physical silver demand in 2015. Silver’s use in photovoltaics for solar energy is expected to move up during 2016 and may move up above 75.8 Moz (million ounces) in 2011, as global solar panel installations are growing at rampant pace. According to industry sources, roughly 1.5Moz of silver are required to generate 1GWe of solar power.  Silver’s use in this application may account for more than 13 percent of total silver industrial demand in 2016, up from 1.4 percent a decade ago. Silver too should perform well in 2016. Silver investment demand too has remained strong not as strong as gold, Silver ETF demand will continue as a function of sentiment towards precious metals and net investor flows. Total combined holdings in silver ETFs are tracking +2% YTD to 620Moz, a contrast to Gold ETF holdings tracking +20% YTD at 56.7Moz  and the best part about silver, it looks strong from supply constraints and also strong demand.

Price Outlook:

We remain upbeat on the outlook of precious metals taking into consideration several factors like a reduced pace of proposed Fed interest rate hikes and the economic uncertainties that underlie this decision-making; increased adoption of negative interest rates worldwide, most recently Japan and in countries like Switzerland;  increased inflows in gold ETFs; and recent trends of a weakening U.S dollar . At present, inflation, another driver for gold, remains somewhat tame, yet continued movements toward higher oil prices, if maintained, lend for inflationary conditions which can also lead to higher investment demand in precious metals. We also reiterate that declines in global gold production by 3% and in case of Silver by 5% will support the prices going forward. We expect during the second quarter of 2016 we may see one more rate hike for the years which can temporary push up U.S. 10 year bond yield to 1.85-190 but post that we expect downtrend will continue so whatever spike we see in dollar index due to rate hike will lead to correction in Gold prices but we don’t expect gold prices to drop below $1200/ounce even if it goes below it one should buy it on MCX maximum downside is pegged till Rs.28700-29000/10gm those are buying levels and for silver Rs. 38500-390000/30kg. Gold can test Rs.31000/10 gm and Silver can test Rs.45000/20kg

Hoisington Investment Management Company is a thought leader in the investment world. In the firm’s most recent “Quarterly Review and Outlook,” Hoisington describes how debt is growing exponentially faster than the economy in the U.S. In 2015, nominal GDP rose by $549 billion while U.S. nonfinancial debt grew 3.5 times faster by $1.912 trillion. Globally, the debt picture is more disturbing. Total public and private debt/GDP is 350% in China, 370% in the U.S., 457% in Europe and 615% in Japan, respectively and central bank are clearly running out of ammunitions in such an economic environment investors should hold bullion as 5-8% of the total portfolio to hedge against uncertainties arising from current monetary policy adopted by central bankers. One should remain invested in precious metals not with expectation of make excellent returns but to hedge against the uncertainties which may arise due to easy monetary policy adopted by global central banks.