Metals Focus sees a more stable gold price this year despite a forecast for a wider market deficit, it said.
It sees the metal averaging $1,190 in 2015 after bottoming out at $1,080, it said in a report on Tuesday, This suggests reduced volatility in the market this year, with gold currently trading around $1,180 per ounce, effectively unchanged since the start of the year.
Selling pressure will emanate from a forecast 73-percent drop in net investment in ETF holdings following a drop of 80 percent in 2014, it said. But pressure may well be limited by better prospects for gold bar sales in Asia, following a slump in demand in 2014 owing to a reversal in the Chinese market.
“Taken together, this is suggestive of overall stability if not a modest improvement in global investment demand for gold compared to 2014. Moreover, other supply and demand factors should also at least mitigate the decline in the US dollar gold price this year,” Metals Focus said.
On the supply side, the firm forecasts overall supply of 4,335 tonnes, with a 14-tonne drop in mine production in 2015 to 3,119 tonnes from record levels in 2014.
This suggests the huge growth in world mine output over the past two decades has come to an end.
“Further downside in mine production is expected in the medium term as low prices shorten mine lives and reduce the project pipeline,” it said.
“Little change year-on-year is also forecast for scrap supply, but in this case the more relevant comparison may be with the far higher levels of recycling experienced in 2010-12. Pressure on the price from old scrap supply has therefore been alleviated considerably,” it added.
On the demand side, the firm forecasts overall demand at 4,446 tonnes, giving a larger deficit of 112 tonnes following a deficit of 28 tonnes in 2014.
Jewellery consumption is expected to grow three percent. Metals Focus says that this healthier picture for demand will protect the downside on gold, with most of the demand expected to come from the key Chinese and Indian markets.
It sees overall jewellery consumption at 2,534 tonnes, with 1,058 tonnes coming from the East Asia region and 688 tonnes from the Indian sub-continent.
Support will also come from central bank purchases although Metals Focus forecasts another fall in net purchases in 2015 at 519 tonnes following the net drop of 60 tonnes in 2014 to 588 tonnes.
“Although net purchases dropped in 2014 they were still exceptionally high by historical standards. Moreover, gross sales were once again trivial, with buy-side interest dominating central bank activity. This is expected to remain the case in 2015, as a number of countries will want to build up their gold holdings for reserve diversification purposes,” it said.
On the predicted increase in US interest rates, which many believe will equate to downside pressure on gold, Metals Focus said that it will “paradoxically remove a major headwind for gold as an investment”.
“This is premised on the assumption that increases will be slow and modest, leaving real short-term rates in negative territory for some time to come,” it added, attributing this to the US economy’s dependence on high absolute levels of household debt and private consumption.
Authorities will therefore be hesitant to derail the recovery by allowing the debt service ratio to get too high.
Metals Focus is “cautiously pessimistic” on the dollar gold price for 2015.
“We believe that 2015 could well represent a bottom with a clearer turning point becoming visible in 2016,” it said. “In part, this is due to gold’s supply/demand fundamentals adjusting to the new price reality and providing a more stable foundation for an eventual investor-driven rebound in gold prices.”
Several potential sparks for a renewed gold bull market from 2016 include “potentially ‘gold-friendly’ developments in debt, inflation, foreign exchange, commodity and equity markets and the scope for a far more malign environment for international relations to develop over the next few years”, it added.
(Editing by Mark Shaw)
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