CBA: Unless market volatility surges gold will remain 'well supported'

Photo by Jason Merritt/Getty Images

After a tough four years, gold is starting to regain its lustre. On the back of renewed US dollar weakness and heightened volatility in financial markets at the start of the year, the spot price has recovered strongly, rallying back to levels not seen since the start of 2015.

Mirroring the price developments, gold demand has also been picking up.

According to Vivek Dhar, a mining and energy commodities analyst at the CBA, ETF gold holdings has jumped by 18.9% to 55.9 million ounces since the start of the year, demonstrating renewed demand for the precious metal.

ETFs, or exchange-traded funds in full, aim to mirror movements in the underlying spot gold price. They are sometimes referred to as paper gold given there is no physical delivery from sellers to buyers.

The chart below, supplied by Dhar, shows the pick-up in ETF holdings of late.

“The lift in USD gold prices has come as investors pare back their expectations for further interest rates hikes by the US Fed,” says Dhar. “Market turbulence, particularly in oil and equity markets, has also prompted gold prices higher on stronger safe-haven demand.”

Dhar also suggests that negative interest rate policies from the likes of the Bank of Japan and European Central Bank is “increasing the appeal of gold as a store of value”.

As for the near-term outlook for gold, Dhar suggests that the metal should remain well supported as long as financial market volatility remains at tolerable levels.

“While gold does act as a safe-haven asset, we believe investors will move to USD and US treasuries if risk levels get high enough,”says Dhar.

“For now, as long as risk levels remain anchored at current market levels and investors expect US interest interests will take longer to normalise, we expect gold prices to remain well supported.”

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