How Did Gold Gain 25% In The First Half Of 2016?

Ah yes, gold, the resource that people have killed each other over for centuries. Okay wait, maybe those days are over, but it’s still a relevant resource. In the first half of 2016, this commodity gained over 25% in value, but why?

Well first, let’s make sure we have a grounded understanding as to how gold works and what impacts price for the yellow metal. Investors must consider several factors—pricing, macroeconomics, and supply/demand—in order to understand gold’s performance. Then, and only then, can investors grasp how gold has managed to finally break out of its multi-year malaise and soar to fresh heights in 2016.

There is a lot of debate over what exactly impacts gold prices, but the reality is there is no simple answer and that several factors influence the metal’s price. Some believe in a negative association between interest rates and respective gold price. As our team points out, laws of supply and demand coupled with high volumes of purchasing in ETFs such as (LAGOS:GLD) and (AX:IAU) play a major role as well.

Pricing

Generally speaking, most commodities are priced in dollars. So if for example the U.S. dollar UUP is strengthening, this means that it takes less currency to buy a given product, including commodities. Because of this, the price of these commodities then falls, although as the recent positive performance of both the dollar and gold has shown us, this isn’t always the case.

Safe Haven

Throughout history, gold has had a reputation as a “safe-haven.” This is due to the fact that it has intrinsic value and cannot be manipulated by the policies of any government in particular. When the market goes south, investors can run away into gold assets and wait for the storm to blow over.

ETF Supply/Demand

Investment in gold has jumped 122% since this time last year, with ETFs and similar products undergoing an over 300% jump. More people buying gold means less gold on the market, and that coupled with high demand raises price.

As of May 11^th, nearly $9.4B worth of investments have gone into GLD (NYSE:GLD) and IAU, which considering these ETFs had significant outflows these last two years signifies a huge shift. The World Gold Council reported that global gold demand grew at its fastest pace ever, with growth of 21% year-over-year in Q1.

Negative Interest Rates

From the beginning of the year, the financial sector has been negatively impacted by the Fed’s lower interest rates, which have made lending less profitable. When expectations that rates would increase went up, bank stocks such as J.P. Morgan (NYSE:JPM) , Goldman Sachs (NYSE:GS) , Morgan Stanley (NYSE:MS) , and Citigroup (NYSE:C) would rise with them.

As Bloomberg highlighted, more than $7 trillion of government bonds offered yields below zero globally. A bond is essentially an investor providing a loan to the government, and a negative yield means that not only are they loaning the money, but are essentially paying to loan it, which holds no logical basis. This status quo has led people to consider such investments as gold instead.

Yes Brexit, You Get Your Own Section

As we (hopefully) all know at this point, the United Kingdom voted to leave to the EU in a referendum held on June 23^rd. The pound-sterling reached 32 year lows against the dollar in the days after as a direct result, and the entire market went down on uncertainty. Gold is to uncertainty as a cactus is to a desert; totally in its element.

As CNBC highlights, there has been a flow of $335M into precious metals due to post-Brexit concerns. Both the economic and geopolitical atmosphere remains uncertain, meaning that we could see further gains in gold prices moving forward.

Bottom Line

For a lot of reasons, gold is unique. Investors need to watch gold under a completely different frame of mind than regular securities. For the reasons mentioned, gold has done very well this year, and could have more growth ahead of it before things get comfy and settled again.