September 12, 2014

Gold Market Update – August 2014

Tensions between the Ukraine and Russia have been less disruptive than a month ago, reducing market volatility and bringing down gold’s risk premium –allowing gold markets to refocus attention on macroeconomic drivers. Reasonably positive economic data out of the US, and some recent…

  • Geopolitical tensions remain a key support for the gold market and with western countries ramping up their involvement, there is scope to further fuel gold’s risk premium. Nevertheless, market volatilities have so far remained contained.
  • Geopolitical factors tend to have only a temporary impact on gold prices. Rather, it is the outlook for the economy and monetary policy that will determine underlying and medium term trends in the market. The steady flow of generally positive economic data out of the US appears to be firming up expectations that the Fed will complete QE tapering in October, with interest rates likely rising from mid-2015. At the same time, inflationary pressures/expectations remain subdued, limiting demand for gold as an inflation hedge.
  • These factors are driving USD strength and contributed to gold prices hitting a 3-month low in early September. The average gold price dropped around 1% in August, but dropped more sharply in early September (currently below US$1,260 per ounce).
  • Despite an improving economy, US treasury yields have been declining, and other major central banks remain determined to keep interest rates lowand liquidity high. This environment could increase gold’s appeal to investors and drive up prices in Q4 (although we expect any gains to be modest and are forecasting yields to rise).
  • Investor have been reluctant to run down their gold holdings as rapidly as they did in 2013, although ETF holdings did fall in August. Physical demand indicators are also a little softer, contributing to a rise in Comexgold inventories. Chinese net imports of gold from Hong Kong have also fallen considerably, consistent with WGC reports of a decline in consumer gold demand over the year to Q2 2014.
  • Aside from the geopolitical risks, further unwinding of India’s gold import restrictions, as external imbalances improve, poses a significant upside risk to gold prices. New stimulus measures from major central banks are also significant, but our expectation for US interest rates to rise is underlying our forecast for further gold price declines in the medium term.

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