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How long will the gold rally run?
08/15/2013 3:31 pm EST
But the medium-term trends make me cautious here. The second quarter numbers from the World Gold Council, out today, show a multi-year high in demand from the jewelry sector and record demand for gold bars and coins. But big outflows from gold ETFs and slowing demand from central banks more than balanced that out. Gold demand fell 12% in the quarter of a four-year low.
Of course, that’s backwards looking. The one piece of data that makes me especially cautious looking forward is that a 6% year over year drop in gold supply in the quarter, which helped support gold prices, was almost totally due to a reduction in recycling as individuals held onto to gold jewelry rather than selling it because of low prices. Mine output increased by 4% in the quarter and supply from recycling fell 21% to 308.3 tons, the lowest since the third quarter of 2009. If gold supply from recycling picks up (or doesn’t fall as much) that will remove some support for the price of gold and if it picks up enough it could lead to another round of production cuts from gold miners.
What’s hard to call, of course, is the level of demand from ETFs. In the quarter John Paulson’s Paulson & Co, the biggest investor in the SPDR Gold Shares ETF (GLD,) reduced its holdings by 53%. George Soros’s Soros Fund Management sold its entire 530,000 shares in the Gold Shares fund, the world’s largest gold ETF. Gold-backed ETF holdings fell 404.4 tons in the second quarter, according to Bloomberg.
The good news to that is that so much selling indicates that investment demand might be bottoming. However, investment demand didn’t bottom with the end of the quarter. Gold holdings at the SPDR Gold Shares ETF have fallen another 97.4 tons from the end of the quarter through August 8, according to Bloomberg.
The other uncertainty is central bank buying/selling. In the second quarter central banks added just 71.1 tons to their reserves, down from 164.5 tons in the second quarter of 2012. Central bank buying totaled 534.6 tons in 2012 but central banks are on a pace to buy just 350 tons in 2013.
My own projection is that volatility in September (and fears of a government shutdown) and the current momentum in gold could take the metal back to the $1400 level of June or the $1460 level of May. But the big danger to this rally is that a tapering off of asset purchases by the Fed in either September or October could lead to a strengthening of the dollar that would stop the rally.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yamana Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
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