Tuesday, June 14, 2016 Derek Macpherson

Gold Bull is Starting to Run

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Evidence suggests that we are in the early stages of a new bull market for precious metals, particularly since funds continued to flow into physical precious metal ETFs during the late May decline in prices. While we believe a longer-term bull market has begun, near-term, it is likely this week’s U.S. Federal Reserve Board meeting could be a short-term headwind, particularly after the recent run-up. However, since evidence suggests we are in a new bull market and gold moves in long cycles, a short-term pullback could be viewed as a buying opportunity.


Return of capital suggests we are at the start of a new bull market for precious metals. While there are a number of factors, both fundamental and technical, that point to a new bull market for precious metals, the simplest is that cash is flowing back to precious metals. Figures 1 and 2 highlight significant fund inflows seen by the ETFs which hold physical gold and silver since the beginning of the year. To put this in perspective, ~US$15.5 billion (12.4 million ounces of gold, 34.4 million ounces of silver) has flowed into physical precious metals ETF’s this year which represents ~31% increase in the combined dollar value of holdings. Importantly, despite a 5.4% decline in the gold price from May 17th to June 2nd, the physical holdings of gold and silver ETFs continued to increase, a significant change from recent years.

Gold ETF Holdings   Silver ETF Holdings


Precious metals equities have been the best performing asset class in 2016 (Figure 3). The quantitative evidence of fund inflows is supported qualitatively by our discussions with precious metal fund managers who indicate they are seeing new money come into their funds. At the same time generalist fund managers who have been underweight precious metals are looking to gain exposure. These fund inflows and lack of precious metals exposure has the potential to see any pullback supported by new money entering the space, likely causing precious metals and precious metal equities to continue to outperform.


After the recent run, FOMC statement tomorrow may be a headwind. U.S. Federal Reserve Board’s Federal Open Market Committee (FOMC) starts its June meeting today, Tuesday, June 14th, and is expected to release a statement tomorrow, Wednesday, June 15th, in the early afternoon. Since weaker than expected U.S. jobs data on June 2nd, the gold price has increased 5.9%. This run appears to imply that U.S. federal funds rate remains unchanged along with a very dovish statement focusing on a weakening U.S. economy, suggesting the next rate hike is likely to be much later this year. We view this dovish a statement as unlikely. Consequently, we expect the statement may negatively impact the gold price over the short-term. However, we believe this likely to only be a short-term headwind, and with investors tilted towards buying, as evidenced by the May 17th to June 2nd pullback, it could present a buying opportunity.

New bull market likely just beginning, as gold moves in long cycles. Like all commodities gold moves both up and down in long cycles. Figure 4 highlights these cycles relative to the S&P 500 (Gold:S&P 500 ratio), that ratio has started to turn, and that gold undervalued relative to the S&P 500 based on the historic ratio. Consequently, we expect the ratio to expand causing precious metals and related equities to continue outperforming other asset classes.
Gold to S&P 500 Ratio


Not all precious metals equities are good investments. Despite our positive outlook for the space in general, we are at the start of the cycle; we believe investors should remain focused on higher quality projects and companies. With a future post we plan to highlight three key themes and a select group of equities that fit those themes.

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