Key Points:

• Gold prices have been relatively resilient in the past couple of months, fluctuating between $1300/oz and $1370/oz since late June, and have risen by around 30% between its most recent trough in mid-December and peak in early August this year.

• The relatively more hawkish communication by US Fed officials, including Janet Yellen at the Jackson Hole Symposium on 26 August, has raised market expectations of further Fed funds rate hike(s) this year, dampening the appeal of gold as an investment asset. While weaker-than-expected US economic data over the past week, including the non-farm payrolls and ISM non-manufacturing reports, point to diminished market expected probability of a rate hike in September, buoying gold prices temporarily, we believe that the outlook for gold price movements is likely to be mildly bearish over the rest of 2016. Central to our outlook are the assumptions that the US Fed will lift the Fed funds rate in December by 25bps and Hillary Clinton will win the upcoming US presidential election.

• After showing a staggering increase in the first half of this year to be the strongest H1 on record, net flows into Exchange Traded Funds (ETFs) slowed noticeably in July and August, although it has regained The Brexit vote appeared to have had only limited upside impact on investors’ appetite in ETFs, after it was obvious that the functioning and confidence of financial markets was not fundamentally affected by it.

• In contrast, jewellery-related gold demand has been lacklustre in the year to-date, dragged down by significantly higher gold prices and highly uncertain geopolitical climate in a number of Middle Eastern countries. However, jewellery demand is expected to pick up in H2 in conjunction with upcoming key Indian festivals, such as Dhanteras and Diwali, combined with Q4 holiday season in western India.

• Overall, we have left our forecasts largely unchanged relative to those published in the Quarterly Minerals and Energy Outlook note published in July. We continue to expect a gradual downward trend in gold prices over the next couple of years as the US Fed resumes monetary tightening, with prices slowing to a touch below US$1300/oz by end-16, before easing further to US$1117/oz by end-17 and US$1058/oz by mid-18.

For further analysis download the full report.

• Gold Market Update – September 2016 (PDF, 831 KB)