Thomson Reuters GFMS reports that, after three consecutive years of annual price declines, gold has recorded a “blistering start” to 2016.

“Gold is the best-performing asset in what has been a turbulent beginning to the year,” notes the 2016 Thomson Reuters GFMS Gold Survey.

The survey’s authors highlight that the dollar gold spot price “surged” above the $1 270/oz level by March 10, hitting a one-year high and is up by 20% since the beginning of the year.

Thomson Reuters GFMS comments that the “impressive performance” is largely attributable to a reduction in risk appetite among investors and fresh interest
in safe haven assets on the back of growing concerns about the global economy.

The survey adds that renewed fears over a “hard landing” in China and its impact on other major economies, along with an escalation of geopoli- tical tensions in the Middle East, further declines in oil prices and the turmoil across global stock markets, prompted investors to seek shelter in “safe haven gold”.

Worries about heightened global market uncertainty have been reiterated by global policymakers, with the world’s major central banks announcing fresh stimulus measures and the US Federal Reserve (Fed) putting its rates normalisation plans on hold.

The authors comment that, since announcing the long-awaited increase in the federal funds rate in December 2015, for the first time in nearly a decade, members of the Federal Open Market Committee have expressed their concerns about increased downside risks to the US economy in recent months, with particular emphasis on economic weakness overseas and the persistently low inflation.

Thomson Reuters GFMS notes that, while the Fed in December initially pencilled in four rate hikes for 2016, recent economic and financial developments prompted investors to reassess their expectations and markedly reduce the probability and frequency of further interest rate adjustments during this year.

This has somewhat strengthened market sentiment, with gold benefiting from the so-called “pricing out the US rate increase”.

“That said, we believe the recent price rally will prove to be short-lived and, once current market turbulence starts to ease, we are likely to see the price retreat again, particularly as physi- cal demand in key Asian markets is already weak,” the authors contend.

Meanwhile, Thomson Reuters GFMS says that, while it was highly unlikely that all four rate hikes would occur, the Fed remains determined to continue tightening, if not in the immediate future, then later in the year. However, should fresh signs of a firm economic recovery in the US emerge in spite of global weakness, the Fed is likely to bring forward any further adjustments.

The survey found that a strengthening dollar and a return of risk appetite would put renewed pressure on gold’s safe haven appeal and prices. Further, while it is likely the gold price will drop below the $1 200/oz threshold in the coming months, Thomson Reuters GFMS believes that gold will find support, owing to the improving market fundamentals.

“On the supply side, we forecast global mine production to drop in 2016, representing the first annual decline since 2008 and the largest in percentage terms in more than a decade.

“While we expect a modest recovery in scrap volumes, particularly from markets where the gold price is not expressed in dollar terms, this is unlikely to offset losses in global mine production, thus resulting in lower total supply,” the authors comment.

By contrast, Thomson Reuters GFMS expects physical gold demand to improve later in 2016, particularly for investment-grade jewellery, triggered by a rebound in “pent-up demand from Asia”.

This is likely to be driven by concerns about the slowdown in China, heightened uncertainty in currency markets, particularly in emerging economies, and a growing desire to diversify personal wealth.