August 2016 – Week 4 Edition

Second Quarter (and First-Half) 2016 Gold Demand Details Released

Last week, we received the details of first-half 2016 gold demand from the World Gold Council.  In summary, investment demand for gold soared in the first half, reaching 1,064 metric tons – far more than the full-year’s investment demand in 2015 (921.5 tons) or 2014 (853.8 tons).  Gold exchange-traded funds (ETFs) accounted for over 50% of investment demand in the first half of the year, accounting for 579.3 tons of net demand vs. negative demand (net sales) of ETF-held gold in 2014 and 2015.

This table measures half a year (2016) against full year totals in 2014 and 2015, but at the current rate of consumption, 2016 demand would reach 4,671 metric tons, a 10.7% increase over 2015.  Measuring the first half of 2016 vs. the first half of 2015, gold investment demand was up 127% in the first half of 2016 over the first half of 2015. For the second quarter, year-over-year gold investment demand was up 141%. 

Central bank gold purchases are down, partly due to the fact that Venezuela was forced to sell 27% of its gold holdings to provide emergency aid to its starving population.  The biggest central bank demand in the first half came from Russia (38.4 tons), China (25.9 tons) and Kazakhstan (9.8 tons).  Net central bank purchases for the first half reached 185.1 tons. This represents year-on-year declines of 40% in the second quarter and -23% for the first half, measured by weight.  However, these declines coincided with a 25% rise in gold prices, so the dollar value of central bank gold demand was about level.  World official gold holdings – at over 32,800 metric tons as of June 30, 2016 – were equivalent to approximately $1.4 trillion – the highest dollar value of central bank holdings since early 2013, when gold was valued at over $1,600.

On the negative side, gold jewelry demand was down, and central bank buying was much lower than in 2015. Gold demand also fell in India, partly due to a jewelers’ strike (thereby hurting jewelry demand in the first half), but a strong monsoon season may fuel heavier gold demand in late 2016, since monsoon rains help India’s agricultural industry, boosting profits and gold demand.  India has suffered two years of drought but has already seen 12 inches of rain in July, the fifth rainiest month since the 1990s.  Unfortunately, the rain has also caused some flooding, which captures the attention of news cameras, but in the end this heavy rain should do more good than harm as farmers recover from two sub-par years.

Will the Fed Raise Rates?

Gold is already playing with house money in 2016.  Gold traded at $1,060 at the start of the year.  Most leading metals market analysts were calling for gold to fall below $1,000, based on the widespread expectation that the Federal Reserve would raise interest rates four times in 2016.  Through the end of August, the Fed has not raised interest rates at all, and the current betting on the “fed funds futures” market is that there is only about a 50-50 chance for any rate increase by the end of 2016.

The second half of the year is generally more favorable to gold than the first half, but after such a strong first-half rise, we’re betting that gold will basically trade sideways through mid-December, in the $1300 to $1380 range.  Gold’s 2016 closing figure will depend largely on what the Fed does in December. If they raise rates, I expect gold to close at around $1320 per ounce, but if they fail to raise rates by December, look for a closing 2016 price of around $1380, following a brief rally above $1,400 in mid-December. 

Any number of surprise events can change this scenario.  Gold will probably rise sharply if Donald Trump unexpectedly wins the Presidency, or if we see another series of major terrorist attacks or further advances by ISIS in the Middle East.  We advise buying gold before such events strike, since gold tends to spike sharply on surprise events.  Gold ETFs are a popular vehicle for buying “paper gold,” but we prefer the real thing. When you buy physical gold, be sure to buy from someone affiliated with leading industry organizations.

Gold Rose $6 Last Week

Gold rose $6 last week while stocks were flat, but gold fell below $1,340 on Monday due to chatter about the Fed possibly raising rates at their next meeting in mid-September.  Specifically, Federal Reserve Vice Chairman Stanley Fischer told an audience at an Aspen (Colorado) conference on Sunday that an interest rate hike was still “under consideration” for this year, justified by higher rates of economic growth and a whiff of inflation. This was exacerbated by the release of more positive economic news and the advent of the Fed’s annual meeting at Jackson Hole, Wyoming later this week (August 25-27).

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