Equity market slump
Gold’s current rally is likely the result of global macroeconomic factors. The tumult in the Chinese stock markets at the start of the year extended to the world markets, causing equities to fall.
The overall performance of the world equity markets is reflected by the MSCI All Country World Index ETF (ACWI). The fall in equities brought investors to haven assets such as gold. Gold’s performance is reflected by the iShares Gold Trust ETF (IAU).
India and China are the world’s two largest consumers of gold, and together they make up about 50% of gold’s global demand. Gold is treated more as a commodity in these two countries, and its demand is relatively inelastic. Even gold’s near 9% surge in price since the beginning of 2016 hasn’t curbed its appeal. Instead, buying seems to have picked up.
Asian market bullish on gold
With China waiting for the Lunar New Year and India in the midst of its festive season, gold buying may see a lift. Gold buying is usually at its peak during this time of the year. Also, more than fundamentals driving gold’s price, right now, psychological factors are in play. Global unrest, especially in China, is prompting more money to be parked in gold. India also seems bullish on gold after its price recovery.
The rise in gold’s price also boosted mining-based stocks, which had tumbled in 2015. Silver Wheaton (SLW), Franco-Nevada (FNV), and AngloGold Ashanti (AU) have risen 9.8%, 6.4%, and 31.3%, respectively, in the past 30 trading days. These three stocks together make up 4.2% of the price changes in the VanEck Vectors Gold Miners ETF (GDX).