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Thomson Reuters
Commodities

2016 Insights: the misbehaviour of gold and silver

Rhona O’Connell

04 Jan 2016

An employee poses for a photograph with two gold figurines in the shape of moon cakes ahead of the Mid-Autumn Festival at a gold shop in Shenyang, Liaoning province August 25, 2011. Gold buyers rushed into Asia's physical market on Wednesday, after prices retreated from the record high hit in the previous session, as investors maintained interest in bullion due to a shaky global growth outlook. The Mid-Autumn Festival falls on September 12, 2011. REUTERS/Stringer (CHINA - Tags: BUSINESS ANNIVERSARY) - RTR2QAHO
REUTERS/Stringer

Is the world of precious metals facing a crisis of confidence? As Andy Critchlow of Reuters Breakingviews expressed, ‘The boom years of the commodities super-cycle, when mining companies listed in London offered high-growth returns linked to China’s rapidly expanding economy, are well and truly finished. The dividend-rich security that attracted investors to the mining sector is also a thing of the past.”

What will 2016 look like? Rhona O’Connell, Head of Metals, GFMS at Thomson Reuters, gives us her perspective in this Q&A.

Can you give us a brief wrap-up for 2015 in terms of the global metals markets?

The year was predominantly affected by slower growth in economic activity in China, weighing considerably on physical metals demand and across the complete commodities spectrum for that matter.

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Gold and silver demand in advanced economies increased, driven by stronger coin demand, while demand in developing and emerging economies contracted. Over capacity also played a massive role on some prices (iron ore, for example), increasing downward pressure.

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How about the impact on the market participants?

With a smaller demand for gold and silver in developing and emerging economies, our customers saw lower transaction volumes and increased competition for market share amid saturated markets along with limited pockets of growth in demand segments.

That said, increased price volatility was good for our business this year, just as 2014 was slower and more boring.

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Can you list what the top market challenges will be in 2016?

  • Chinese growth will continue to weigh on industrial metals demand
  • The pace of US Fed rate hikes will prove challenging
  • Cyclical peaks in gold and silver mine production will lead to protracted declines in 2016 and beyond
  • The vote on British exit from the EU will keep many occupied in September and will have consequences for Europe if the UK decides to leave.
  • The refugee crisis in Europe and protracted tensions over Syria will occupy customers’ attention and may impact their willingness to invest.

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What are your personal predictions on where the market will head towards, in 2016?

Precious metals will reach a 90s-style price plateau that could last for several years. This plateau will hold across both advanced as well as developing/ emerging economies.

We agree with Larry Summers, that a controversial side effect of a Fed interest rate increase will likely be nasty given the level of the dollar. Profits of US companies will come under pressure, resulting in lower stock valuations. With a resulting drop in the equity index, the Fed might discuss reversing the policy in favour of renwed liquidity injections.

China will devalue its currency at least one more time to join the race to the bottom in Asia.

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Finally, what is one book you would recommend to our readers to find out more?

One book that has influenced my perspective is ‘Misbehaving, The Making of Behavioral Economics ‘, by Richard Thaler (Buy this book on Amazon).

Thank you for your time, Rhona!

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