StoneX: The Big Question in Gold Right Now

The first half of the year is in the books, and for gold it’s brought upward momentum, with the yellow metal increasing about 15 percent during that time.

But gold’s climb hasn’t been without setbacks, and it’s led to questions about exactly how high the precious metal can go and how long its run may last.

In a conversation with the Investing News Network, Rhona O’Connell, StoneX’s head of market analysis, EMEA and Asia regions, explained what happened to the yellow metal in Q1 and Q2. She also touched on catalysts investors should watch for moving forward. Read on to learn her thoughts.

Gold resilient in face of Q1 market selloff

To put gold’s current situation into context, O’Connell began by giving a brief summary of how the yellow metal performed during the first quarter of the year.

At the beginning of January, gold was sitting at around US$1,550 per ounce. According to O’Connell, sentiment was “reasonably bullish,” with many experts calling for the precious metal to go much higher over the course of 2020 — even though it rose only about 15 percent in 2019.

She noted that initially the COVID-19 outbreak did little to move the price of gold because market participants weren’t sure what kind of an impact it would have. “There wasn’t a lot of action to kick off with, but as as things started to get more and more worried, then prices did kick up,” said O’Connell.

After that uptick, gold took a steep drop below US$1,500 in mid-March, declining along with the broader markets. The fall was concerning for some given that the yellow metal is often touted as a safe haven.

“In normal times, (gold) just gives (investors) a more robust performance or a more resilient performance, if you like,” she said. “But when things really go badly it does tend to get sold, partly because generally speaking it has been reasonably strong performer, but also because it’s very liquid.”

As O’Connell explained, gold actually did its job well during that time — it sold off less than equities and other commodities, and has more than bounced back from its mid-March drop.

“So although it made the headlines by coming down in what seemed to be quite a spectacular fashion, in fact when you compare it with everything else, it was relatively robust, and it went back up to where it was pretty much,” she noted.

Q2’s boring price not indicative of a boring market

O’Connell noted that gold traded horizontally for much of Q2, but emphasized that there was still a lot going on behind the scenes in terms of global economic and fiscal stimulus efforts.

“More often than not if the price is boring it’s tempting to think, ‘Oh, the market’s boring.’ But quite often it’s not the case at all — a boring price doesn’t mean a boring market at all,” she said.

For example, the expert mentioned a 500 billion euro COVID-19 recovery fund proposed in May by German Chancellor Angela Merkel and French President Emmanuel Macron. It was later expanded to 750 billion euros by the European Commission, a move that O’Connell said came despite opposition from the “frugal four” — Austria, Denmark, Sweden and the Netherlands.

“The point was that they’d obviously seen that they were going to have to cooperate because this thing isn’t going to go away in a hurry. And we need we need more fiscal and economic stimulus,” she said.

“That took about US$40 off gold … but what that signifies to me, rightly or wrongly, was that if it can come off by US$40 when you get something like that, that suggests that the pandemic premium is well and truly priced into the metal.”

O’Connell also pointed to mid-June comments from US Federal Reserve Chair Jerome Powell, which came after the central bank announced its decision to leave interest rates unchanged at 0 to 0.25 percent.

“What I thought was particularly interesting — and obviously I wasn’t the only one by any stretch of the imagination — was that he started using words like forceful,” she said.

“He definitely upped the level of his rhetoric around technically using the same tools, but he was (being subtly) more aggressive about it. And he also said definitely for as long as it takes.”

As O’Connell pointed out, gold was up by US$30 on the day after Powell spoke, and rose a little more the day after that. “So we’ve got this horizontal range, but all sorts of different forces swirling around it, which is one of the things that I think makes it so interesting. So it looks a bit boring, but in fact it’s not.”

When will the physical market come back?

For O’Connell, the physical gold market is a key point hanging in the balance right now. “The big question is when will the physical market come back and to what extent?” she said.

On a large scale, O’Connell noted the absence of the Chinese and Russian central banks, which in recent years have been big buyers due to diversification efforts.

China, she said, is watching its foreign exchange reserve currency level very closely. Meanwhile, Russia made headlines earlier this year when its central bank announced it would stop buying gold on April 1.

It has reportedly spent $40 billion over the last five years on gold, bringing its stockpile of the yellow metal to a value of around $120 billion. No reason was given for the halt, but analysts have speculated that the country has simply built up as much gold as it wants.

On a smaller scale, O’Connell pointed to “the complete lack of interest in the market in Asia when it comes to individual purchasing.” She said the dearth of buying relates to last year’s gold price increase, but it has continued longer than she had anticipated.

“You do expect the markets to stand back because they’ve got to get used to the higher price and so on and so forth. But generally it doesn’t take more than a matter of weeks for them to start coming back into the market having got used to the new higher price — (that) didn’t happen.”

She isn’t expecting much in the next few months from key gold consumers China and India, and emphasized that when and to what extent those markets come back is uncertain.

“The physical market’s taken a real kicking. That begs the question, if the physical market isn’t there, why isn’t the price lower? The answer is that if the physical market was there, the price would be a lot higher.”

In the near term, she suggested that market participants watch not central banks or individual buyers, but professional money managers. “It’s always going to be perceptions of economic and financial and political risks that will be the main drivers amongst the professionals because they’re the ones who produce the money really quickly. So they’re the ones who will dictate short-term trends,” she explained.

And she did leave investors with some positive words about gold: “It’s not actually fluctuating by very much, which is what you want if you’re looking for something that diversifies risk.”

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.