Gold 2014: Investment Demand, Geopolitical Risks, and Corporate Discipline
ETF Inflows and Emerging Markets Demand
JOE FOSTER: There have been some interesting shifts in the supply-demand dynamics for the gold market this year. First of all, gold bullion ETFs have seen inflows this year. This comes after some relentless outflows during 2013 that helped drive the price of gold down last year. These inflows show us that investment demand is returning to gold. We also saw tremendous demand in China last year, and that Chinese demand was taking a lot of that ETF money. It's still early in the year but we're starting to see demand still strong in China. Perhaps there isn’t as much demand as last year but it’s still strong, which is a positive sign for gold. The third thing I'll point to is India. In the second half of 2013, demand out of India dropped off significantly because of exchange controls and import restrictions that were placed on the Indian gold market. There are still talks this year about the Indians reversing or relaxing many of those controls. That could be another catalyst that moves gold prices higher later in the year.
IMA CASANOVA: Geopolitical risks across emerging markets seem to also have been supportive of gold so far this year.
FOSTER: Yes, in fact emerging markets geopolitical risks have probably been the main driver of gold this year. People are worried about financial stability with headlines coming from Thailand, Venezuela, Ukraine, and Turkey. People are also concerned about the growth in China and the Chinese banking system. When people sense these types of risks, they sometimes turn to gold as a hedge against geopolitical risk. That's been a driver this year, and with resolution nowhere in sight for many of these countries, we think it will continue to drive gold throughout the year.
Gold Miners and M&A
CASANOVA: With gold rising we have seen gold equities significantly outperform gold. We think a lot of it is driven by the companies doing what investors have been requesting: focusing on profitability, being more disciplined with their capital allocations, higher returns on capital. We see a more disciplined and conservative approach, and companies are focusing on meeting expectations, which is critical for how the market reacts. Going forward this year, if we have a rising gold environment, we might see gold equities continue to outperform gold and show that leverage to gold.
FOSTER: I think you're right there. Another thing we've seen this year that we haven't seen in the recent past is some significant M&A activity. We saw a hostile takeover attempt in January, and that got the sector going. I think we could see more of that as we've seen a lot of reserve write-downs. These companies are going to have to replace those reserves somehow in order to sustain themselves going forward. I believe M&A activity could be another thing that drives gold shares moving forward.
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