The great gold rush of 2016 is gathering pace. Holdings in exchange-traded funds have now surged by a quarter, with investors taking advantage of lower prices over the past two weeks to enlarge stakes on rising concern about central bank policy making worldwide.
Gold is the best-performing major metal this year after silver amid rising concern over negative rates in Europe and Japan and whether the Federal Reserve will be able to tighten further. Demand jumped to the second-highest level ever in the first quarter, according to the World Gold Council, and billionaire hedge fund manager Paul Singer has said gold’s rally may just be beginning. Investors are being driven to gold on a structural shift in investment demand.
Firstly, the negative interest rate environment and quantitative-easing policies are reducing the pool of suitable investment options, and making gold less costly to hold, and while there may be more U.S. rate hikes in the pipeline, prevailing rates remain very low. Second, lingering fears of competitive currency devaluations and potentially fresh bouts of market volatility encourage safe-haven demand.
After the Fed raised rates in December, investors have been scaling back expectations of further increases amid concern about the strength of the global recovery. The chances of a hike at next month’s policy meet are just 4%, down from 75% at the start of the year, according to data compiled by Bloomberg. Higher U.S. borrowing costs typically hurt gold prices while boosting the dollar.
While central bank policies may have contributed to gold’s gains this year, some countries’ banks [notably in China, Russia and Kazakhstan] have also been substantial and consistent buyers. The World Gold Council estimates that nations are expected to buy 400 to 600 tons this year, compared with 566.3 tons in 2015.