The potential negative long-term effect of higher tariffs amidst trade tensions between the US and its trade partners, particularly China, geopolitical tensions between the US and Iran, uncertainty surrounding Brexit and other political and economic concerns in the UK and Europe have all prepared the ground for such a surge in gold prices.

While gold’s price increase in June was particularly sharp – driven by falling rates, higher risk and momentum – investors have generally been more bullish this year. According to World Gold Council, this is evidenced by the positive inflows in gold-backed exchange traded funds (ETFs), capturing $5 billion or 108 tonnes led by European funds as well as higher net longs in Comex futures in the first half of the year. In addition, central banks reported net purchases of approx. 247 tonnes, equivalent to $10 billion, continuing their expansion of gold holdings as part of reserves.

The global monetary policy has shifted by 180 degrees. Less than a year ago, both Federal Reserve board members and US investors expected interest rates to continue to increase, at the very least through 2019. But by December, the most likely outcome was for the Fed to remain on hold. Now, the market expects the Fed to cut rates two or three times before the end of the year.

The Fed has not been alone in this respect. European Central Bank president Mario Draghi recently announced that they are ready to extend bond purchases or cut rates to sustain economic growth. The Bank of Japan (BoJ) is also expected to make policy more accommodative, with emerging market central banks likely to follow suit.

The prospect of lower interest rates should support gold investment demand. World Gold Council research indicates that the gold price was higher in the 12 months following the end of every tightening cycle. Moreover, historical gold returns are more than twice their long-term average during periods of negative real rates while the US dollar – usually a headwind for gold – is seen remaining range-bound as trade tensions and lower rates offset continued economic growth.

The first half of 2019 proved quite eventful for financial markets. Stocks retraced their Q4 2018 losses by the end of April only to pullback again in May. A few weeks later, stocks reached new highs yet again. At the same time, central banks across the globe have signalled a more accommodative stance, bringing global bond yields to multi-year – and in some countries, all-time – lows. As investors looked to balance higher stock prices with an increasingly uncertain environment, gold prices surged, making gold one of the best performing assets by the end of June.

Council analysts feel that going forward, the financial market uncertainty and accommodative monetary policy will likely support gold investment demand. Similarly, price momentum and positioning may fuel rallies and create pullbacks, as investors continuously reassess their expectations based on new information.

But weaker economic growth is expected to soften gold consumer demand near term, although structural economic reforms in India and China will likely support long-term demand, the Council feels.

There is a strong possibility of weaker economic growth and the possible impact of higher gold price volatility resulting in softer consumer demand this year, especially in emerging markets that make up the lion share of annual demand. In addition, the Council estimates that the recent announcement of a 2.5 per cent increase to gold’s import duty by the Indian Ministry of Finance may result in a reduction to 2019 demand of up to 2.4 per cent.

The Council further feels that if the higher levy were to become permanent, it could reduce long-term Indian consumer demand by slightly less than 1 percent per year. And yet, the broad structural economic reforms being implemented in both India and China will likely support long-term gold demand, it observes.

Gold demand is linked to jewellery, technology and long-term savings, and these are important determinants of long-term performance. In the short and medium term their impact is felt predominantly when there are significant changes to demand. Conversely, gold investment demand amidst higher uncertainty – including speculative activity – can sway prices in a meaningful way in the short and medium term but its effects level off in the long run. In addition, gold supply through mining or recycling brings balance to the market.

Looking forward to the rest of the year, the Council believes that consumer demand may be soft and speculative activity could amplify price movements but, overall, it is likely that investment demand will remain robust and central banks will continue their net purchasing trend. (IPA Service)