Financial fears to support gold: GFMS

Resurfacing financial fears will ultimately be supportive of gold, says Reuters in a study published this month.

The precious metal is being weighed down by the strong US dollar, and a sell-off is possible, triggered by weakened emerging markets, writes Rhona O’Connell, Head of Metals for the GFMS team at Thomson Reuters.

"[The] bear market in 2018 has largely reflected the continued strength in the dollar, driven in part by trade wars and latterly by the crises in Turkey and Venezuela, with the contagion into other emerging markets’ currencies," writes O'Connell.

"Whether any of the central banks of those struggling nations have been sellers of gold . . . has had less effect on the market’s sentiment than the belief, well founded or otherwise, that they might be sellers."

This week marks 10 years since the collapse of Lehman Brothers, a trigger point in the financial crisis of 2008. Since the collapse the vicissitudes of the financial markets have seen investors returning attention to gold.

"Lehman Brothers filed bankruptcy on Sept. 15, 2008, and gold rallied hard, reaching $899 on Sept. 23. While there was an inevitable correction, this set the foundations for gold’s three-year bull run, peaking on Sept. 5, 2011 at $1,896.50", O'Connell writes.

The gold market has been through several phases, but is generally viewed as a ‘safe haven’ asset, or a store of value in times of market turmoil.

"In 2013, a substantial amount of gold was a bought by local banks in China. Gold continued to drift lower through to the end of 2015 with professional and private investors continuing to migrate from the ETFs and COMEX positions, and gold’s role as a risk-averse asset was not really in demand over that period", O'Connell adds.

The bull phase of 2016 and 2017 was essentially driven by resurgent geopolitical uncertainty, including the result of the Brexit vote and the U.S. election. The subsequent bear market in 2018 has largely reflected the continued strength in the dollar, driven in part by trade wars.

With finance fears re-surfacing, GFMS asserts that ultimately, they will prove to be supportive for gold.