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Gold Opens 2016 Strongly – Up $20 (and Rose Strongly in 2015 – Outside of America)
Gold opened 2016 strongly, with a $20 rise in the first two trading days – January 4th and 5th. The official year-end benchmark was the London pm gold price fixing on December 31 of $1062.25. Gold moved well into the $1080s in New York trading on Monday and Tuesday, while the stock market struggled.
Ironically, Barron’s first “Commodities Corner” column of 2016 was titled “Gold Likely to Stay Tarnished.” Presumably they were speaking of dollar-based gold investments, since gold is far from tarnished in Europe, South America, Canada, Russia, Mexico and many other regions of the world.
The biggest story about gold is “hidden in plain sight” since most Americans follow gold in U.S. dollar terms, but in terms of several other major global currencies, the price of gold actually rose in 2015
In dollar terms, gold closed 2015 down 10.4%, according to The Wall Street Journal year-end accounting. Silver was down 13.5%, but gold and silver actually performed far better than most other commodities, including the Reuters-Jefferies CRB Index that measures 19 of the world’s most essential commodities.
In the 16 years since the the start of the century (since December 31, 1999), gold has risen 266% vs. 39% for the broad S&P 500 stock market index, so gold is still a comparative winner in the 21st Century. Most of those gains came from 2001 to 2011, when the dollar was relatively weak. Since then, however, gold has declined while the U.S. dollar has been soaring, especially over the last 18 months, since mid-2014.
Gold Rose (in Terms of MANY Major Currencies) in 2015
Last year, the U.S. dollar rose in terms of every other major currency, except for those “pegged” to the dollar. For 2015, the weakest currency was the Kazakhstan tenge, against which the U.S. dollar gained 85.2%. That means the price of gold rose 64% in Kazakhstan, which may explain why their central bank is buying gold every month. (A weak ruble also explains why the Russian central bank is buying gold.)
Gold rose in terms of 16 of the world’s 50 leading currencies, including these 10:
Gold also rose in terms of Chile’s peso, Peru’s new sol, Uruguay’s peso, Malaysia’s ringgit, the New Zealand dollar and the afore-mentioned Kazakhstan tenge. Furthermore, gold broke even in terms of the Australian dollar, while declining only 1.3% in terms of the European continental currency, the euro.
Those nations with relatively weak currencies tended to add gold to their central banks during 2015:
- Kazakhstan has increased its gold holdings for 38 straight months, according to the IMF.
- Turkey bought 290,000 ounces in November, reaching 16.39 million ounces total (510 tons).
- Russia bought 22 metric tons in November, the ninth month in a row of Russian gold purchases.
In North America, here is the comparative performance of gold over the last year in terms of the U.S. (blue) and Canadian (gold) dollars, making gold investors north of the border relatively richer.
The “3D” Outlook for Gold in 2016: Supply, Demand and Currency Choice
Gold’s fate in 2016, as in most years, depends on the fundamental factors of supply and demand, but currencies make this a three-dimensional calculation, since gold rises and falls at different rates in terms of different currencies. If the dollar should fall in 2016, for instance, that would help U.S. gold bugs.
On the supply side, there is much debate about whether 2015 was the “peak” year for gold production from new mines. Since it takes an average of 20 years for a new discovery to reach peak production and the peak year for new discoveries was 1995, 2015 may have been a year of peak production. With gold prices below $1200 for most of the last two years, many mining operations cannot make a profit in their current operations, so they have already closed down operations or plan to close them down. Lower new supplies inevitably lead to higher prices. The cure for a low gold price, therefore, is a low gold price.
On the demand side, we see growth of middle class buying power in the major markets of China and India, which account for roughly one-third of the world’s population and one-half of global gold demand each year. China’s central bank added almost 200 tons in 2015. Since 2009, China’s gold reserves are up 57% in just six years. The private gold market is also expanding in China with record-setting demand on the Shanghai Gold Exchange. Meanwhile., India will likely import over 1,000 tons of gold for all of 2015.
In America, supply and demand meet most often at the U.S. Mint. The 2015 demand for the Silver American Eagle set a new all-time annual record for demand, at 47 million ounces. Demand for the Gold American Eagle grew 53% to more than 800,000 ounces. In 2015, there were times when the Mint had to limit orders or delay deliveries. The same supply crunch has happened at the Royal Canadian Mint.
The key to American demand, however, remains in the hands of the Wall Street momentum traders and their positions in gold ETFs and gold futures contracts. They are still net bearish, but that trend is changing. One example is commodity analyst Dennis Gartman, who has been bearish on gold (in dollar terms) for a long time, only advising investors to buy gold in euro terms, but in late 2015 he told CNBC’s popular “Fast Money” panel that “after a 4½-year bear market, it’s time to be bullish. I got long of gold late last week, and if we get above $1,085 I will get longer.” He cited the fact that the “commercials,” who have been net short gold, “are almost net long.” He says “this is a reason to be abundantly in.” He said the “commercials are always ahead of the public… My suspicion is that we’ve seen the lows in gold.”
However, we will most likely have to wait for a $100 advance in gold (in U.S. dollars) for more of Wall Street’s momentum traders to get on the gold bandwagon in 2016, but smart investors will buy earlier!
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