A fresh uptrend for gold in these volatile times? Don't bet on it

HEIGHTENED risk aversion is giving gold a second wind but those hoping for a repeat of its extended bull trajectory between 1999 and 2011 should probably not hold their breath.

Just last week, gold surged past US$1,260 per ounce as investors sought respite from flailing equity markets, poor bond yields and an uncertain global economic outlook. While the price has softened in recent days, gold has still outperformed virtually all other traditional asset classes so far this year with a return of more than 10 per cent based on the gold spot price. Major equity indices such as the S&P500 and MSCI World are in the red, as are credit indices. In the last bull run for gold, those who invested at its trough in 1999 reaped a cumulative return of nearly 650 per cent. But gold has also endured fairly long periods of losses; the latest one was between 2011 and end-2015, when it fell by around 44 per cent, according to World Gold Council data. The big question is: is 2016 the start of a fresh uptrend for gold?

To be sure, a number of factors are lined up in gold's favour. One is the continuing backdrop of low and even negative interest rates. The European Central Bank (ECB), Sweden, Switzerland and, more recently, Japan have resorted to negative interest rates as a means to stimulate economic activity and bank lending. This has raised concern that central banks may have run out of policy options, burnishing the appeal of gold as a store of value. A second factor is that supply/demand dynamics are in favour of appreciation - at least in the short term. Data from the World Gold Council shows that gold demand rose 4 per cent in the fourth quarter of 2015 on a year-on-year basis to a 10-quarter high, boosted by central bank demand. Supply fell 10 per cent as mine production fell for the first time since 2008. For the full year 2015, demand was flat and supply fell 4 per cent.