Why the price of gold rose 20% in 2016
by Judy Baker, Argo Gold
Let’s start with discussing the bottom of the market and the backdrop. The Fall of 2015 was pretty grim in the resource sector. We were into long innings of oversupply of oil, (although the US was an economic bright spot) the world economy outside of the US continued to be in a state of malaise, and Goldman Sachs was calling for US$1000/oz. gold.
In December 2015 gold was trading around the US$1070/oz. level and there was fear it would even go lower but it actually held in around these levels. Even Goldman Sachs with their house short position and investor recommendation against gold couldn’t push it below US$1000/oz.
We were already into years of oversupply in the relatively small mineral commodity business. Glencore was the first to recognize this in February 2012 when they bid for the portion of Xstrata that they didn’t already own. Basically they were consolidating two large mineral commodity producers to reduce supply. A year later – April 2013 – was the biggest one day drop in the gold price in 26 years. US$1600/oz. gold bullion straight down to below US$1400/oz. As gold is the elephant in the tent in the relatively small mineral commodity business - a US$200 billion dollar market on an annual basis relative to the copper market which is more like a US$100 billion dollar market on an annual basis – the April 2013 downward move in gold price resulted in significant negative sentiment towards both gold and the already slowing mineral commodity business. Copper actually held in relatively well until the end of 2014 but it seems to be a managed destocking process in copper. By the beginning of 2015, the mineral commodity business was a “sunset industry” yet again and gold was a “sunset investment”. The Chinese economy was in decline and then the Chinese stock market declined in the summer of 2015 spreading uncertainty worldwide as the second biggest economy in the world. 2015 just kept getting grimmer.
In November 2015 there was a little article in the Economist showing Canada was one of only five countries that didn’t have negative real rates. Apparently this was a bright spot for Canada but the feeling on the ground - with the fallout of the oil price a year earlier – November 2014, ongoing low mineral commodity prices, no investment interest in gold and the country’s oil and gas export capacity hindered by the capability to build pipelines for export – the sentiment was relatively depressing even though Canada was one of five countries without negative real rates!
Certainly there have been years of concerns with the world’s largest economies seemingly running the printing presses fulltime and the low interest rate environment where government bank officials were calling this the “new norm” but then the “Negative Real Rates” theme started echoing from economists. Negative real rates – how is this sustainable?
With the new backdrop of “Negative Real Rates”, the money sloshing around the world and frothy valuations in many investment options; there was renewed investment interest in beaten up gold bullion. It is hard to see where the buying comes from in the bullion market but the investment in producing gold stocks appears seems to be very much a US driven investment based on my opinion that the gold producers with relatively large US investor bases moved first and foremost.