Gold has regained its momentum following Federal Reserve Chair Janet Yellen’s caution on rates but their upcoming April announcement still spells uncertainty for the precious metal.
Yellen’s dovish tone on March 29 confirmed expectations of subdued US monetary tightening, causing the S&P to hit a 2016 high and the dollar to slide.
Gold meanwhile is enjoying its best run in 30 years and its greatest quarter since 1986 as nervous investors park capital in the precious metal.
While the Brussels attacks on March 22 temporarily increased moves to safe-haven assets, monetary policy is still the driving force behind the recent gold rush.
Analyst at BullionVault, Adrian Ash, commented on central banks’ role: ‘Gold tends to do well when other classes do badly, but it does best when people lose confidence in central banks and this is what we’ve seen so far in 2016.’
The gold price has moved into the so-called 'golden-cross', where the short term moving average surpasses the long-term moving average. But where does it go from here?
Investor attention has now quickly turned to the Fed's April 26-27 announcement, and the prospect of a rate hike reversing the commodity's gaining momentum.
Speaking to Citywire Switzerland Loïc Schmid, head of the asset management and CIO at Geneva Swiss Bank said the gold rally was down to monetary policy but also hedge fund activity.
'Investors are choosing gold as a hedge against hazardous monetary policies, this is a very real story as they are scared about what comes next,' he said.
Hedging your bets
‘A lot of CTAs and hedge funds were short gold in 2015. During the China chaos in January this year they began covering their positions. Collectively these funds are huge so when they reposition, they really move the market. Short covering by this area of the market is what essentially has moved gold prices.
With regards to the 'golden cross', Schmid said there is resemblance between 2014’s strong start and now. However, the latter period was swiftly followed by a pullback.
‘I remain positive in the long term as I think central banks have gone too far. However medium term we have recently scaled back our position a little as now everyone is talking about gold again and we are foreseeing a re-run of 2014’s false start.’
As gold prices continue to rise, investors are doing their best to gauge the moment the balance will tip. However, gold equity investors continue to face a torrid time in performance terms.
Florian Siegfried (pictured), Citywire AA-rated manager on the Precious Capital Global Mining and Metals fund, which is the leading fund over both one and three years in his sector, has maintained a bullish stance on gold specifically, while also being positive on related investments.
Siegfried believes markets are at the early stages of an emerging bull market for gold and gold stocks, therefore, gold miners are beginning to look appealing having been out of favour for some time.
‘A number of high-quality, mid-tier gold mining companies – which took advantage of the previous downturn to bolster their future production profile – have potential to provide an attractive entry opportunity for value and growth-oriented investors,’ he says.
‘Following the sell-off in January global equity markets have rebounded strongly. The rebound was supported by seasonal strength in crude oil and narrowing credit spreads but we consider this as a bear market rally which will soon conclude.
‘Despite the current risk-on mentality, gold has held up very well and unlike in the past few years when there was a good mood in equity markets gold did not sell off this time.'
This could run and run
He added: ‘In the second half of March, gold and gold stocks have overreacted to the upside and are now correcting to find a consolidation period. This could run for a few more weeks.
‘Once this consolidation phase is over, gold will continue its trend which is to the upside. This correction is setting up the next uptrend in gold.’
Depressed valuations over the past couple of years have created value in the sector, Siegfried said: ‘It is all about buying low, effective project development and the ability to turn this into future free cash flow. In my view, numerous M&A transactions of the past few months will turn out to be value-accretive for long-term shareholders of the acquiring companies.’
Siegfried outperformed in his Equity - Gold & Precious Metals, sector with total returning 45.9% in Swiss franc terms over the 12 months to the end of February 2016. This compares to an average manager loss of 7.9%, also in Swiss franc terms, over the same period.