Gold has been underpriced for a long time but now market shocks, mining moves and central bank policies are all aligning to suggest a big gold price push is imminent
1) The net speculators’ position is net short.
At negative 5%, the net position of speculators is one of the most short positions as a percentage of Open Interest (size of whole marketplace) in history. Typically, when you have all the speculators on margin leaning one way against gold, the reaction can be sharp in the opposite direction. Investors should ignore this current set up at their own risk.
2) Equities are beginning to look risky.
Gold is seen as a very useful part of portfolio insurance. When other assets, especially equities, are high, allocating more money to gold can reduce your overall portfolio risk because it tends to have a negative correlation to equities. i.e. Equities down, Gold up.
Currently, some of the most reliable historical measurements show equities as more overvalued than at any time in history. John Hussman’s chart of Cyclically Adjusted Price/Earnings (CAPE) adjusted for margin, shows the very precarious position of the US equity market.
3) Bond yields are creeping up.
Interest rates and bond yields are rising. After the decade of insane monetary policy experiments by the world’s central banks – with zero or negative rates and mass bond buying flooding the system with cheap money – inflation is now rising.
Rising inflation is never welcome as people lose purchasing power. Gold is often sought when the worries of inflation are realised so people can protect the value of their savings.
4) Central banks are buying gold.
The price of gold has been low for some time now, around $1,200 per ounce for much of the year, and central banks seem to be taking advantage. The reasons appear myriad: Just last week Hungary increased its gold reserves ten-fold Poland recently made a significant purchase of gold, while China, Russia and India have made massive additions to their gold reserves, continuing a trend that started before 2018.
Although central banks tend to be secretive about when and how they acquire gold, such a buying trend is positive because it shows demand and faith in the metal as a key holder of a state’s wealth, demonstrating that central bankers want to diversify their assets beyond bonds and reserve currencies. This is especially poignant with the two most populous nations, China and India whose middle classes are gaining in buying power.
5) Peak gold production and mining consolidation.
Gold production has never been easy. Mining takes place in some of the most inhospitable places on Earth and currently it has never been harder to find or extract profit. Most experts acknowledge that the gold price drop from $1900/oz in 2011 to today’s $1200/oz has effectively cut exploration budgets by 90%.
Many of the bulk mining projects of the last few years, with reserve grades at barely 0.5g/ tonne, have been put on care and maintenance. Collectively $85 billion has been written off the balance sheet of gold mining companies. Simply put, at $1200/oz, it is not cash flow positive to mine most global gold mines – they lose money.
The consequences, while slow to pan out, will be a chronic shortage of new and profitable deposits coming on board, if indeed there is supply at all. The recent merger of Barrick Gold and Randgold is symptomatic of the needs of the whole industry.
6) Gold’s season is coming.
The pressure on the supply of gold doesn’t necessarily mean there will be less demand, particularly in the domestic markets of China and India, by far the world’s largest gold consumers.
The Hindu festival of light, Diwali, takes place in November. During the festival, gold giving is prominent to such an extent that annual rises in the global gold price are typically reported, moving through Christmas and then rising again around Chinese New Year. As the economies of China and India continue to expand such a movement is likely to become more pronounced – especially following the prolonged depression of the gold price this summer.
7) Gold is at the bottom of the cycle.
Analysts have been predicting the floor of the gold price for some time, saying that due to the risk of over-priced equities the time is right for underpriced gold to rise in value. As money moves from shares and bonds, gold will not only be seen as a safe-haven but one giving yield as it begins to show returns to those who buy before the price rises.