Factors bode well for gold says China Post Global's Danny Dolan
Gold traded below $1,100/oz in 2015, but more recently in 2019 traded above $1,500.
Although still off its highs above $1,800 during the Eurozone sovereign debt crisis period in 2011-12, it still represents a continuation of a trend that started around 2000, when the precious metal traded below $280.
Danny Dolan, managing director at China Post Global (pictured)- the international arm of China Post & Capital Fund Management, which provides mutual funds and exchange traded products - says that demand and supply factors continue to bode well for the asset.
Q. The World Gold Council has recently published research suggesting that there could be significant drivers of demand for gold, such as a relatively high propensity for investors who have never invested in the asset to consider doing so in future - to what extent is retail demand a factor in your outlook for gold into next year?
"I would agree with the WGC. They're right about demand increasing. Demand clearly has increased substantially in 2019 and the reasons for that will continue to apply into 2020."
"Main reasons include monetary policy easing - there have been three Fed rate cuts year-to-date; the lack of yield in other asset classes -particularly thinking of the record level of negative yielding debt outstanding, particularly sovereign but not exclusively - and the pressures that that puts on institutional investors, particularly those with return targets, that are difficult to meet under those circumstances in a sustained low yield environment."
"Stalling economic growth is another. Germany narrowly avoided recession, as announced in mid-November, but the spectre of recession is hanging over global economy and has done for some time."
"Geopolitical risks are very high on a relative basis. From Brexit, from other eurozone concerns, to the US, impeachment inquiry and the primaries ongoing for next year, from Hong Kong, North Korea, and tensions in South China sea. There's no shortage. Obviously, the US/China trade war has been particularly weighing on markets as well - all of which has driven demand for gold as a safe haven."
Q What about institutional investor demand for gold? Is this an area where you see any particular trends?
"Jewellery purchases are down in 2019, some 16%, mainly due to reduced consumer confidence in India and China. But financial investment in gold tends to be a bigger driver of gold prices than physical demand for jewellery."
"Demand for gold investments looks set to continue increasing for all the reasons discussed."
"None of those factors - low rates, monetary easing, stalling growth, geopolitical risk - look like going away anytime soon."
"Regarding retail investors; it's been documented in the last major gold bull run that retail investors were relatively slow to join, or relatively late to join that run. The signs so far are that it's a bit different this time. Retail demand for gold has increased. We have seen record turnover in gold ETFs and ETPs as an indicator of that."
"Retail investments may be a bigger factor in the US in the ETP space. In the institutional space, there's been record gold buying by ETFs and ETPs. In the institutional space they are particularly sensitive to rate cuts and other indicators."
"Another major trend has been gold buying by central banks, for example, Russia and China. 2019 looks set to be another record year, beating the record set in 2017. Turkey has also contributed to that."
Q What about the dollar and gold?
"Traditionally, there is a negative correlation between dollar strength and the gold price."
"There have been three Fed cuts this year, and presidential demand for more from the Fed - very public pressure. It is still seen as an easing environment in the US, in that it's not done yet, which bodes well for the gold price."
"Gold is as much a currency as it is a commodity, by virtue of its supply dynamics and its role in the global economy. I would take comfort from a weakening dollar as a gold investor - there's every reason to do so."
"From our perspective, I agree that there is a weakening dollar environment. There is downside risk to sterling as well depending on the outcome of the election and its implication for Brexit and the stock market."
"The dollar isn't operating in a vacuum. There are risks to other currencies too. But generally the current dollar outlook and recent rate cuts bode well for the gold price and generally we've seen people take optimism from that."
Q. What are your views on supply of gold through 2020 and beyond? Are there any significant supply shock risks?
"We are less likely to see a shock given the nature of gold supply, which is reasonably healthy. Supply rose only 1% over the past year to 2019, the lowest growth rate in a decade."
"It is not surprising to see gold recycling on the increase. When gold prices are high, that tends to happen. Gold recycling is at its highest since Q1 2016, mostly from jewellery but also industry and devices."
"There are a lot of different elements to gold supply. Many will think of mining primarily. Recycling is around 30% of new gold availability at the moment, which is an interesting factor. But also when it comes to supply it is worth remembering the high geographic diversification - some countries up and some down, depending on economic and political factors, and the natural lifecycle of mines and reserves."
"Recently, Mexico, Australia and Ghana have been on the up, the US slightly down, South Africa significantly down, Peru even more so. So, there are swings and roundabouts when it comes to overall production."
"We would see gold supply risk as reasonably low, because most gold ever produced is still out there. New gold mined only adds about 1% to total outstanding gold every year. So, new gold only equals some 2 weeks of trading on the markets, which means gold is more stable than other commodities such as oil, which are consumed. In that sense, it's a pretty stable supply and we don't see huge risk from that side."
"It is also worth remembering that the gold price influences the mining industry more than the mining industry influences the price."
There are a couple of outlier events. There have been two atrocities in Burkina Faso in the past month or so, with some 39 miners murdered and another 60 injured, another in October with some 20 miners killed. So clearly, there is risk of terrorism in some countries - Mali, Burkina Faso - with security a risk but not in a way that has a material impact on overall gold supply."
"The high price is incentivising further production. And generally, the gold mining sector is in good financial health. A lot of mining companies worked hard on reducing their cost base and increasing profitability earlier in the decade, and that's bearing fruit for them."
"Also, recent consolidation in the sector has reduced costs a bit, all of which means risk of underinvestment in mining would be strategic rather than because of cost constraints or lack of funds. In that sense we are pretty comfortable."
Q. Accessing the asset class: Bars/bullion, or physical backed ETFs/ETCs, or gold securities - which is your preferred route and why?
"Different investors will have different objectives and preferences."
"It is not a one-size-fits-all approach. We've always preferred gold securities, gold equities. We've had a gold mining ETF since 2007. That's proven extremely popular over the years."
"There are a few reasons for that. Firstly, it's Ucits compliant, which allows for gold exposure with increased protections of a Ucits funds. Compared to physical backed ETFs/ETCs that's one clear advantage. It's for a variety of investor types, either because they take comfort from the Ucits governance and various investor protections, or because their own internal rules and regulations require them to only select Ucits funds, or sometimes both."
"For a number of reasons European investors tend to favour Ucits funds. That implies gold securities."
"The sector and its companies are in strong financial health, and with gold prices high, and profitability significantly higher than in recent past, certainly five or so years ago, many gold producers are seeking to increase dividends. That's a factor in favour of gold stocks as opposed to bars, bullion, coins or physically backed ETPs."
"Thirdly, gold stocks allow for leveraged approaches when the gold price is strong. For example, the ETF has gone up about 40% versus the around 20% rise in the gold price in the past 6 months. The reason for that is the economic profile of gold producing companies. Once production costs have been cleared, the increases in the gold price and the price at which they are selling is effectively clear profit and increases the company value to a large extent, as reflected in the stock price."
"In a bull market for gold, you tend to get this positive leverage effect, and in that environment you would logically favour gold stocks over physical gold. The opposite is true also; in a bear market investors will prefer physical gold."
"We would expect the bull market for gold to continue for certainly the medium term. That's generally the market view as well. That means continued leverage upside for gold stocks versus the physical gold price. Investors in gold stock ETFs, whether ours or others', over the past year have benefitted hugely from this - getting twice the return."
"It's a recognised effect. On the institutional side investors are aware of that from previous gold bull runs. So, it's a greater or lesser factor for some investors over others, but it's definitely driving demand. We have seen exchange turnover rise this year and in recent months."
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