Gold Silver Reports – The current bear run of gold has been the main topic of discussion in 2015. The crucial question no is whether it will continue in 2016. The World Gold Council(WGC)says there are important conditions that are likely to make 2016 different from 2015.
The Fed increased the federal funds rate by 0.25 basis points during its last 2015 meeting. Widely anticipated by the market, this moved the target range between 0.25 and 0.5 basis points. However, what is not so certain is how quickly and how high they will raise rates to ‘normalise’ them (ie, reach their terminal rate).
The Fed expects to increase rates by 1% by the end of 2016.7 Market consensus is more dovish and expects the Fed Funds rate to be below 1% by the end of 2016.
Either way, rates may remain low for some time. WGC believes that interest rates are not a dominant driver of the gold price once the effect of the dollar is taken into account. And the dollar has already strengthened more in the past two years than it has since the ‘dot-com bubble’ burst. In fact, the dollar is at the highest level it’s been at the beginning of a Fed tightening cycle since the 1980s.
This is important for two reasons: The dollar tends to revert back to its long run average and after two years many foreign currencies start to show signs of recovery A strong US dollar is a de-facto tightening mechanism, thus preventing the Fed from moving interest rates too far too soon and risk crippling economic growth.
The Asian gold market continues to expand. In China, the PBoC’s periodical announcements on additions to their gold reserves from June onwards and the Shanghai Gold Exchange’s intention to introduce a yuan-denominated trading mechanism highlight the growing importance of this market. Similarly, the Indian gold trade has expressed its intent to establish a gold exchange in the not-so-distant future. In addition, market risks abound.
The interconnectedness of global financial markets has resulted in a higher frequency and larger magnitude of systemic risks. Stock valuations in the US remain quite elevated as investors have been increasing their risk exposure in search for returns amid a very low yield environment .
In such an environment, bonds offer less protection to soften the blow of a stock market correction. And while macroeconomic conditions in advanced economies have improved, market and liquidity risks are close to record highs. In such an environment, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant, WGC said. ~ Neal Bhai Reports