Morgan Stanley commodity strategists led by Hussein Allidina write in a new note to clients that although gold may suffer for a bit as a result of the uncertainty surrounding Fed policy, there are four reasons to be bullish on gold long-term:
- The market probably doesn’t have to worry about the ECB as a major seller: Morgan Stanley writes that “since 1999, the risk of sustained and large scale European central bank selling has declined with three consecutive five year Central Bank Gold Agreements (CGBAs),” and that emerging market central bank gold buying since 2006 adds to the tailwinds for gold.
- Physical gold demand is on the rise: Morgan Stanley says that ETFs have changed the game for investing in physical gold in the wake of the 2008 financial crisis, and that even in China physical gold funds are catching on, which represent a huge source of demand for the precious metal.
- Central banks are driving an unwinding of gold hedges: Morgan Stanley writes that the CGBAs mentioned above cap the amount of gold central banks can lend, which is “helping underpin a phenomenon known as de-hedging,” the practice of “either buying back or delivering into outstanding gold hedge positions,” which has provided a supplemental buyer of gold in the market and should continue to do so going forward.
- Supply in the gold market is falling as mines produce less: This is due in large part to developments in South Africa, the largest gold producer in the world. Morgan Stanley explains that “over the course of the past ten years, South African production has declined every year in absolute terms, presenting the industry with a formidable challenge to increase total output at a time of rising demand.”
However, Morgan Stanley cautions that a strong U.S. dollar is a major headwind for gold and will remain a major risk, complicating the forecast going forward.