Market Vectors, the exchange-traded product division of US asset manager Van Eck Global, has released its 2016 gold market outlook report, which reflects a gradual price recovery for gold and incremental advances for tracking ETPs.
The report looks at several key factors, including the influence of Federal Reserve policies, the outlook for the US dollar, a strengthening of broad commodity markets, production challenges for gold miners, and the effect of market positioning, and the predicted impact on the yellow metal’s price.
Market Vectors propose a slow, gradual recovery is the most probable course for Gold-tracking ETPs to take during 2016.
Contrary to popular opinion, recent investigations highlight that interest rate hikes do not have a strong bearish effect on gold pricing. These reports show that the directional movement of the gold price during such scenarios depends on several other factors in play. That being said, Market Vectors argues that any movement by the Federal Reserve in 2016 will be incremental and subdued, highlighting the Fed’s cautious approach to its first interest rate hike in nine years and an expected US GDP growth rate of 2% as evidence. The firm argues therefore that Fed policies should exert a muted effect on the gold price regardless of its direction.
Furthermore, Market Vectors highlight that although federal debt levels are currently at 100% of GDP, interest is at multi-decade lows of around 11% of GDP. Due to an approved range of tax breaks and credits, analysts estimate the interest burden could double if rates returned to 2007 levels. This suggests there may be significant political pressure to keep rate increases muted.
Downward pressure in the gold price due to appreciation of the US dollar is also argued to be unlikely. The US dollar enjoyed a significant period of strength between July 2014 and March 2015 with the US dollar index advancing 25% over this period. The index has maintained these gains through December 2015. Market Vectors contends that the drivers of this bull run, namely a US economic recovery upon a backdrop of weak global growth and the anticipation of the Federal Reserve increasing rates, are already reflected in the dollar’s price. Further gains in the greenback appear unlikely.
Adding support from the supply side of the market, production of gold is expected to decrease during the course of the year. A recent study by Credit Suisse show that 15% of production in its coverage universe is free cash flow negative at a gold price of $1,100. These mines that are operating at or below the margin will be forced to close down unless gold makes a sustained recovery beyond this level. As of 14 January 2015, the price of gold is $1,092.
Demand across the commodities markets has been influenced mainly by a slow-down in China and the transition of its economy from an industrial revolution to one led by consumerism and services. Market Vectors believes the bottom has likely been met and most of the bad news has been priced in.
Lastly, current gold positioning (extreme levels of bearish bets) has historically been indicative of a turn-around in the market. Assets within Gold bullion ETPs have reached their early 2009 levels. This suggests that most of the extraordinary gold buying that occurred in ETPs after the financial crisis has already been unwound.
Investors wishing to gain long-exposure to the gold price through the structure of an ETP may consider the following options:
Market Vectors Van Eck Merk Gold Trust (OUNZ)
ETFS Physical Gold (PHAU)
ETFS 2X Daily Long Gold (LBUL)
ETFS 3X Daily Long Gold (3AUL)
Investors may wish to obtain a less direct exposure through holding stock of companies engaged primarily in the mining of gold bullion. The following options exist:
Market Vectors Gold Miners ETF (GDX)
Market Vectors Junior Gold Miners ETF (GDXJ)