is bullish; negative rates spell deeper trouble
Ross Norman, one of the most consistent gold price forecasters on the LBMA, says the pressures driving gold higher will not go away.
The key factor, he says, has been a move by central banks to embrace negative interest rates globally, hitting people “directly and personally”, as lending is turned upside down. Japan recently followed Switzerland, Sweden and the EU in lowering rates below zero, an unprecedented financial experiment, meaning depositors will pay interest on savings and banks will be paid to borrow.
“It's when you get charged for positive savings that you really recognise that things are rather bad,” Norman says. “There's no question in my mind that the scale of the [national] debt cannot be paid down. I'm not saying it's a mathematical impossibility, but it's getting towards it.”
“They've done a very good job, central bankers, to give the appearance of normality, but it has to unwind at some point and I think that general recognition is falling upon people more broadly. Debt is outpacing growth 2-to-1, it has been for decades. You can't sustain that forever.”
Physical buying has been buoyant, says Norman, who is chief executive of London-based bullion broker Sharps Pixley. The company had a record day this week, whilst its German parent company, Degussa, had a record December.
Gold also had a strong start to the year in 2014 and 2015, Norman points out, with mid-February the high point. This year “there isn't the overhang of possible interest rate rises,” but buying on the futures exchange has not yet been strong enough “to get momentum going... on the technical levels, if we can go through $1,263, we're very much back to the races again.”
Norman is therefore bullish, but not outrageously so. “I would be above $1,263. I'm concerned we haven't had the momentum follow through, but I remain more concerned by the economy.”
Ross Norman is chief executive of
bullion broker Sharps Pixley
Charlie Morris, who managed $2.5bn at HSBC, turned bearish on gold in February 2013 when it was trading at $1,660. Earlier this month, the three metrics he follows swung the other way.
First is the monetary environment. In 2013, the US Federal Reserve began slowing its purchases of long-dated government bonds, tightening monetary policy and pulling money out of the bond market. It then lifted rates in December last year for the first time in nearly a decade, sending gold to a low of $1,050.
Morris says the move resembles 1937, when the Fed lifted rates prematurely coming out of the Great Depression, forcing it to back-peddle, as the US re-entered recession. Stocks have tanked this year and dovish statements by the Federal Reserve mean the global “tightening bias” has gone into reverse. “Gold's never made headway when real interest rates have been above 1.8 per cent,” he says. “We're way below that now and we're back on a negative trajectory.”
Secondly, Morris looks for gold to be rising in all major currencies. Underpinned by monetary easing, this year it has been climbing in yen, euros and sterling. Long-term averages have steadied, but are not yet turning upwards.
His third criteria is momentum. Jewellery buying and mine supply tend to be pretty steady, so “it's the investor that really decides whether gold is going up or down.” And whether people admit it or not, markets are mainly made-up of momentum investors; safe-haven buying, driven by financial alarm, “tends to be temporary” and has “a history of fizzling out.”
“All the evidence suggests that investment flows in aggregate are momentum driven,” he says. “People, without realising it, are trend followers.” Before funds begin flowing into gold in truly vast quantities, it therefore has to be beating the stock market, its major competitor for capital. “When there's a better trade in town, the gold market loses attention.”
All three signals are no longer bearish, so Morris is confident that December's $1,050 low was the bottom of the market. But nor are they all bullish, so for the time-being he is neutral and says gold “won't go off like a rocket like it did in 1999.”
The second quarter of the year, he cautions, is almost always bad for gold. Holding bullion in just the second quarter every year since 1987 would have delivered investors a negative total return. Those who dodged the quarter would have nearly tripled their money.
is neutral and warns against the second quarter
Photos: HSBC and the Sharps Pixley gold showroom in London