Gold Markets Rally as Central Banks Impact Sentiment

February 12, 2014 Updated: April 24, 2016

Gold Markets Rally as Central Banks Impact Sentiment

Gold markets are trading at their highest levels in three months, as precious metals investors continue to revise their long-term biases along with the changing policy stances expressed at the US Federal Reserve.  As long as Janet Yellen and her policy-making counterparts continue to suggest prolonged tapering in stimulus programs investors will likely seek out alternative investments.  This essentially means stock markets will suffer (as corporate earnings projections start to drop), and investors will be looking for different ways to store their assets.

Historically, one of the most popular selections for these types of investment strategies has been found in gold, so it is not entirely surprising to see the precious metals rallying in the early parts of the year.  These rallies have carried into silver prices as well, with the metal showing its best streak of gaining sessions since 2011.  The latest moves have been helped by comments from Federal Reserve Chairman Janet Yellen, which showed cautious optimism for the economic as a whole, but more selective concern for the progress of the US labor markets.  The conclusion was that stimulus tapering would continue but that we also might see a less regular pace of the economic data does not support the broader outlook.

How High Can Gold Rally?

“As Fed stimulus programs took control of both the economy and financial markets,” said Tony Davis of Atlanta Gold and Coin, “gold saw gains of more than 70% in the period between December of 2008 and June of 2011.”  More than $2 trillion in Fed stimulus helped propel gold prices to new all-time highs above $1,900 per ounce.  And, at this stage, the main question investors are asking is:  How much higher can gold prices rally?

When we look at the multi-year averages, the market’s tendencies would appear to suggest that gold prices could extend much further before we start to see any real selling pressure.  And when we add the supportive fundamental outlook, there is little reason to believe that this year’s rally has completely run its course.  Another encouraging element for investors is the fact that it is now possible to buy-into preciously metals markets at a relative discount, given the fact that prices closed in negative territory for last year.  

The next major issue going forward is the extent to which changes in central bank policy will impact sentiment.  It is now clear that the Fed is not in any hurry to completely end its stimulus programs.  But as long as the US central bank signals no major changes in its tapering trajectory, there is a much better chance that gold markets will be able to continue in their already-established direction.  Another factor to consider, of course, is the rising level of demand that is now seen in emerging markets.  

China has recently overtaken India as the world’s largest precious metals importer and continued trends in this area could easily mark another supportive factor for gold prices.  Overall demand in emerging markets will depend heavily on global performances in GDP, so as long as we see no relative stability and no major declines, we will likely see strong demand for physical gold throughout the remainder of the year.  The ETFs most closely associated with precious metals could see some divergences here, however, as stronger performances in these areas will require supportive sentiment — and this will require central bank activity that is better conducive to buying in gold-related assets, rather than in their stock market counterparts.

US Dollar Activity

Finally, it will be important to watch for changes in market trends for the US Dollar.  Gold is priced in Dollars, so we would need to see bearish activity in the greenback in order to argue for a gold supportive stance in commodities markets.  Into the end of last year, the Dollar was met with heavy selling pressure against both the Euro and British Pound.  Continued trends here will depend on both generalized growth performances (as measured by GDP).  But in some instances we will need to see inflationary pressures building as well if we are to expect that these trends can continue in currency markets.  In any case, these are the factors that will drive gold values in the weeks and months ahead.