Gold has continued to gain in value this year, confounding the doubters. The question now is whether the metal is due a major correction. Not so, claim some who say the drivers behind the metal's rise are intact, writes David McKay.
Expensive to hold and non-yielding, and yet a unique combination of economic and geopolitical forces has propelled gold to second in the ranks of the world's most important monetary reserves.
That's according to European Central Bank data that says bullion accounted for 20% of global official reserves last year, second only to the US dollar at 46%, and exceeding the euro (16%).
Gold's seemingly inexorable rise has continued this year.
By the end of June, gold was one of the top-performing major asset classes, rising 26% over the period, according to the World Gold Council's interim report, published in July. The metal also recorded 26 new all-time price highs during the period, having registered 40 new price highs last year. Given the rate of improvement in the metal's price, the question is whether more gains are possible, or whether the current elevated gold price is here to stay.
Naturally, views on the topic are wide and varied (and probably doomed, as a history of gold price forecasting tends to show). Overwhelmingly, analyst agree that the factors that drove the metal's price gains are likely to stay. These characteristics are weaker US dollar, range-bound yields with an expectation of rate cuts by the Federal Reserve, possibly in the fourth quarter, as well as heightened geopolitical tensions some of which are directly linked to US trade policy.
Central bank purchases of gold are also likely to continue, says Andries Rossouw, Africa energy, utilities and resource leader for PwC. "Gold is probably going to stay strong for some time still until we get a bit more peace in the world, or until various countries decide there's an alternative to investing in gold in a risk-off position".
"We are seeing substantial increase in geopolitical stress and conflict, and it is not clear that this will reduce in the short term", says Andrew Van Zyl, Managing Director of SRK Consulting in South Africa.
This is already having spinoffs across the metals spectrum, says Van Zyl in what he terms " a constant struggle to create resilience". Increased geopolitical tension and disruption to trade flows will "lead regions and countries to become more self-sufficient", resulting in additional mining, processing and power generation, he says
