Bull-run in gold coming; watch out for $1,400/oz level: CLSA's Chris Wood

Gold prices are likely to trend higher going ahead, but investors need to be cautious and should not believe the bull-run in gold has begun till the prices convincingly break above the $1,400 per ounce (oz) mark, says Christopher Wood, managing director and equity strategist at CLSA in his weekly note to investors GREED & fear.

“Investors should not believe that gold has broken out into a new bull market until bullion convincingly breaks above $1400/oz. For now this has not yet happened while gold stocks are still not outperforming in a convincing fashion. This raises the risk of further near-term downside should, for example, a successful US-China trade deal trigger more ‘risk-on’ action in markets and potentially renewed monetary tightening expectations. Still GREED & fear continues to believe that a renewed bullish gold breakout is coming sooner or later,” Wood says.

After hitting a high of $1,349.80/oz in the calendar year 2019 (CY19), gold prices have slipped around 4.6 per cent to $1,287.55/oz – a level was last seen in December-end 2018.

Central bank's buying of gold last year, according to reports, reached its highest level since Nixon’s suspension of dollar convertibility into gold in 1971. All the buying was done by central banks outside the G7. 

Flows into gold ETFs (exchange-traded funds) have also started to gather steam. Except for February, when the holding in global gold-backed ETFs and similar products fell by 33 tonnes to 2,479 tonnes, equivalent to $1.3 billion in outflows, the overall ETF flows remain positive on the year ($1.8 billion) on the back of strong inflows in January, a World Gold Council report suggests. The fall comes after four consecutive months of inflows.

“The primary driver of global outflows was North American funds, as momentum investors took profits using these, the most liquid of the US-based funds. However, we continued to see inflows into low-cost ETFs, a factor we believe is linked to strategic allocations. Funds in Asia also experienced outflows, while European and other regions were flat. We continue to see inflows into UK-based funds, likely driven by Brexit,” the WGC report says.

Gold-backed ETFs and similar products account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies. Flows in ETFs often highlight short-term and long-term opinions and desires to holding gold.

Going ahead, experts do agree with Wood’s view that gold prices are headed higher in 2019. Gold’s performance in the near-term, they say, will be heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms. As it stands, they believe that these factors likely will continue to make gold attractive.

“We expect that the interplay between market risk and economic growth in 2019 will drive gold demand. Financial market instability, monetary policy and the US dollar and structural economic reforms are the three key trends that will influence its price performance,” says the WGC report.