Gold: The balance of factors has turned bullish

Harvey Morrison, Portfolio Manager, Investment Advisor
Mackie Research Capital Corporation
E:, T: 416-860-8644


From January of this year gold bullionstaged a very impressive rally during the first half of the year. After trading as low as $1,046 per ounce in mid-December 2015, gold tacked on $325 by early July to trade at $1,375 per ounce. Since then half of those gains have been lost in what so far appears to be just a correction rather than the start of a new bear market. The commodity now trades at just a little over $1,200 as of mid-November. From a ‘technical’ standpoint (reading the charts) a decline of ½ to ⅔ in value is not uncommon for a retracement in an ongoing bull market. There are some compelling arguments that can be made to believe that gold’s move is the start of a new bull rally rather than just a counter trend bounce in an on-going bear market.  

Since mid-summer the metal has been pressured lower by a strengthened US dollar and rising bond yields.  As part of his political platform, Donald Trumppromised to rebuild America’s crumbling infrastructure. The market has interpreted this as expansionary fiscal policy. That means higher deficits and possibly higher inflation in the years ahead which, in turn,  has pushed interest rates higher. Higher bond yields may have helped fuel the US dollar rally and the combination of the two have pressured gold lower. However, a strengthening dollar usually is not good for gold and the US dollar Index has recently touched highs last seen in 2003. It is encouraging that gold has been able to hold as well as it has in the face of this strength. 

The U.S. dollar has recently broken out to a 13 1/2 year high.  The last time the dollar was at these levels gold was below $400 / Oz. 

The U.S. dollar has recently broken out to a 13 1/2 year high.  The last time the dollar was at these levels gold was below $400 / Oz. 

Demand and Supply


The World Gold Council (WGC) recently released their 3rd quarter 2016 report on demand & supply trends. In the latest quarter they found central bank purchases of gold were down through the first three quarters of 2016 compared to the same period in 2015. Purchases increased by 271.1 tonnes this quarter compared to 407.7 tonnes the year previous.   India, a source of strong demand in prior years’ has been relatively weak this past year. The WGC credits this weak demand due to near record prices in terms of Indian Rupee. Gold pricedin terms of rupee has suppressed demand and encouraged selling. Demand for gold has been further dampened by government regulations put in place to curb undeclared income.  One bright side of Indian government regulation has been seen recently with the banning of certain denominations of currency. This action has sparked an increased demand throughout the country for bullion. Investors in other nations have, no doubt, taken notice of these actions. Another section of the report notes that investment demand from the Middle East is down significantly from last year with the drop in oil prices. Demand for physical gold from the investment community returned in 2016. Gold holdings in exchange traded physical gold ETF’s are up over 35% since the first of January and have held up surprisingly well despite the recent drop in gold price. [see chart below] 

There are signs in the futures market of a low being formed in gold at this time. The “commercial” traders, the so called ‘smart money’ have been covering their shorts and adding to long positions. At the same time the “large speculators”, the trend following hedge funds and money managing institutions and large investors are reducing long positions from what had been a historically very high level. This should be interpreted as bullish.   


SNL, a unit of S&P Global Market Intelligence, released a report this past June titled “Strategies for Gold Reserves Replacement”. The data in the study dates back to 1990.  In the past as exploration budgets increased, gold reserves and resources increased. This relationship has changed in recent years. Budgets increased dramatically in 2011 through 2013 with no corresponding increase in gold reserves and resources.   

 Source: SNL; S&P Global market Intelligence

 Source: SNL; S&P Global market Intelligence

Although it has yet to show itself in the price of gold, the balance of factors has turned bullish. From a technical standpoint, gold has made a normal correction from overbought levels seen this summer. Gold has held up well in spite of a strong US dollar. Retail buying has remained buoyant. Looking at the futures market,  the so called ‘smart’ money is reducing their short positions while the large speculators are reducing their long positions. Looking at supply, there really has not been any significant deposits found in the past sixyears despite very large exploration budgets. The decline in gold over the past three months is likely just a pause in a new bull market rather than the resumption of the old bear trend. The recent price weaknessoffers investors an opportunity to get on board for what is anticipated to be the next wave up in gold’s new bull market.

Harvey Morrison

 Harvey Morrison is an experienced Portfolio Manager able to act in a discretionary basis with expertise in trade administration and execution with a high degree of expertise in the mining market sector.


Mackie Research Disclaimer: The opinions, estimates and projections contained herein are those of the author alone as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this article or its contents. Information may be available to MRCC which is not reflected herein. This article is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. 

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