Gold in focus: July 2017

Gold began 2017 strongly, up 8% in the first half – despite falling 2% in June. This weakness has continued into early July, with the strong US payrolls data exerting further weakness on gold. However, gold received some support following Fed Chair Janet Yellen’s semi-annual testimony, which the markets interpreted as somewhat dovish.

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Overview:

  • Gold began 2017 strongly, up 8% in the first half – despite falling 2% in June. This weakness has continued into early July, with the strong US payrolls data exerting further weakness on gold. However, gold received some support following Fed Chair Janet Yellen’s semi-annual testimony, which the markets interpreted as somewhat dovish.
  • Gold tends to move inversely with the US dollar, as a lower dollar ensures a lower price for non-US buyers, thereby raising their demand. Conversely, gold tends to be positively correlated with the Japanese Yen, as both are viewed as safe haven assets. Of late, the JPY has been weakening due to the widening interest rate differential between Japan and the rest of the developed world due to the Bank of Japan’s operations.
  • A sharp rise in gold imports from India and China during the first half of this year has provided support for gold, although the World Gold Council predicts some easing in Indian demand due to the launch of the GST in July, 2017. China continues to provide innovative gold offerings, including the launch of Microgold, which allows users to electronically send gold through WeChat.
  • Demand for gold from Central Banks has been generally subdued, with the exception of the Central Bank of Russia, which has steadily been raising its purchases of gold.
  • Gold supply is expected to modestly ease in 2017, with Reuters expecting a reduced quantity of mined gold production.
  • The cross-currents impacting gold tend to generate divergent outcomes. Overall, we are mildly optimistic about gold – despite some near-term weakness. While an expectation for higher interest rates generates headwinds, gold’s safe haven status, low correlation with other assets such as equities and the possibility of a re-emergence of financial market volatility will help underpin demand. We are forecasting the price of gold to be around USD1,235/oz. by end 2017, rising to USD1,300/oz. by end 2018.
  • For gold’ price to descend to around USD1,100/oz and below, we would need a period of heightened geopolitical/financial calm. Conversely, a major geopolitical or financial shock could see gold’s price surging above USD1,400/oz. This is not our central forecast, though.

For further details, please see the attached document