By Martin Waller
The correlation between the Vix index and the price of gold has been noted here before. The Vix, or volatility index, is produced by the Chicago Board Options Exchange and measures the market’s confidence or nervousness. When markets are nervous, investors tend to pile into gold as an established safe haven, forcing the price higher.
A similar correlation seems to be emerging between gold and the actions of the President of the United States since Donald Trump won the election in November. The gold price spiked at above $1,300 an ounce in the days before the poll, but plunged in the weeks that followed as it became obvious that the Trump administration was keen on economic stimulus, which would be good for share prices and would draw investors out of gold.
In addition, higher inflation might be good for gold, which is held as a hedge against it, but any consequent rise in US interest rates would be bad for the metal’s price because they would offer investors in US Treasuries a better yield. Gold, by its very nature as an inert metal, does not offer a yield. So went the argument then. The price has been rising again in recent weeks as tensions over the Korean peninsula have been increasing.
Yet the relationship is more complex than a straight read-across from rising fears of Armageddon to the hoarding of a precious metal. The rise has been accompanied by a fall on global stock markets, itself driven by political uncertainty. Then there is an inverse correlation between gold and the dollar. The US currency has been weak because of signs that the American economy may not be doing as well under President Trump as had been thought. Yesterday’s consumer prices figures indicated that the outlook for inflation was fairly benign. All this delays the next US interest rate rise and puts pressure on the dollar.
Then there are seasonal factors. The gold price tends to strengthen towards the autumn as Asian farmers convert the money they get from harvesting into the metal. Demand also increases during the gift-laden wedding season in India, which is approaching.
All of this suggests several factors moving the price, mostly upwards. The Vix index hit its highest since May this week, before easing back. The market is undeniably nervous.
At just above $1,287 an ounce last night the gold price is again testing $1,300. Ole Hansen, head of commodity strategy at Saxo Bank, says that there is buying from speculative investors such as hedge funds that until now have had relatively light positions in gold. According to Arabian Pure Gold, a City-based dealer, first-time buying was up by 76 per cent this week, with evidence that the money was coming from low-interest savings accounts and Isa funds, suggesting that relatively unsophisticated retail investors are buying.
Are they right to? This column has suggested before that gold is not a good investment in the long term because it pays no dividends. Buying shares in the handful of London-quoted goldminers makes more sense because they provide income. As Mr Hansen says, though, if the buying of gold does presage a market collapse, those shares will be hit, as well, though a price over $1,300 might mitigate any fall.
As it happens, the four main London-listed producers have been in the news of late. Petropavlovsk, which mines in Russia, has been the focus of an investor revolt in which its co-founder, Peter Hambro, was voted off the board. The halfway trading update was positive enough, but the shares are still valued in pennies and remain an unknown quantity. Acacia Mining is locked in a dispute in Tanzania over alleged unpaid taxes. Its shares remain a highly speculative investment. The Egypt-focused Centamin, the source of some grief for investors in the past, is in a solid enough position, but dividend income is uncertain.
This leaves Randgold Resources, the biggest. This has confirmed that it will hit production guidance for 2017 at a cost of below $600 an ounce, less than half the world price. The dividend yield is about 2 per cent. Not stellar, but better than you get from a block of metal.
Source: The Times
