Gold forecast and analysis report in Q2 2015

Otmane El Rhazi from The Bullion Desk.

Overview of the Gold Market in Q2 2015

Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the Precious and Base Metals. Below is the Gold report, to read the full report covering all the metals in pdf form click here.

Subscribers to FastMarkets Professional have access to the report before it is published here.

Gold – looking vulnerable as resistance persists

Summary

Despite an initial lift from safe-haven demand early in the year, gold remained overshadowed by dollar strength – markets continued to price in the start of higher interest rates in US later this year. Seasonally strong physical demand helped cushion the impact of speculative and investor disinvestment and will continue to do so into the second quarter. But while this demand fades, gold will be increasingly vulnerable to downside pressure, we feel. Still, the dollar may have run ahead of itself so a period of dollar weakness could provide some lift. For the second quarter we are looking for a range of $1,170-$1,250 per ounce.

Overall trend – Gold was bolstered early in the first quarter by flight-to-safety demand in response to renewed Middle East violence and aggressive monetary easing by numerous central banks. But its failure to extend above $1,300 per ounce weighed on confidence and has triggered a test back towards the November low. Persistent overhead resistance continues to threaten near-term price sentiment.

Fund activity – Comex speculators lent upside momentum to gold across January when new longs and short-covering lifted the NLFP to 188,925 contracts. Gold’s failure to extend above $1,300 has since triggered stale liquidation from speculators, with the NLFP back to 54,281 contracts late in March. With limited short-covering noted – gold recovered only to $1,200 late in March from $1,155 – we feel speculators are becoming less bullish.

ETF investment activity – A flight to safety helped to bolster ETF holdings across the first quarter but the stalling of prices has given rise to disinvestment, which has acted as a drag. Net holdings in the funds we monitor stand some 38 percent below their end-2013 peak but the prospect of higher interest rates will continue to threaten further stale liquidation while investors seek higher-yielding assets.

Physical demand – Lunar New Year celebrations helped suppor   t gold demand in China, with the latest SGE withdrawals figures suggesting wholesale Chinese gold demand is running 10 percent above year-ago levels. In India, buyers delayed purchases ahead of the budget at the end of February. While there was disappointment that the government held import duties at 10 percent, buyers have responded to lower prices, with restocking seen ahead of the festival of Akshaya Tritiya in mid-April. While several auspicious dates on the Hindu calendar between now and mid-June will help support physical demand in India, it is expected to slow overall into the mid-year.

Central banks – Central banks remained net buyers of gold in 2014, adding 477 tonnes to reserve holdings last year. This marked only the second year of net purchases over the past 50 years, according to the World Gold Council. Further diversification among central banks in emerging markets (EMs) should provide a source of net demand but there have been reports recently that Venezuela is looking to monetise a proportion of its holdings as part of a swap deal. Given the volatility in EM economies after the Federal Reserve initially sought to taper its asset purchases, coupled with the drop in oil and other commodity prices, the monetisation of central bank holdings could become a larger factor in the medium term.

After the initial gains in January, the historical inverse correlation between gold and the US dollar continued to feature heavily on the gold price across the first quarter. Stronger US economic activity and the prospect of higher interest rates will continue to act as a drag on prices in the near term.

The chart above reflects the surge of demand from the physical sector in the latter part of 2014 in contrast to the cautious stance in early 2015. We note the acceleration in gold imports into India in March, with provisional figures indicating imports in excess of 130 tonnes. We have not included imports for China and Turkey.

ETF holdings in Europe have been bolstered by the relative strength of euro-denominated gold prices. Yet we feel ETFs will remain a supply source in 2015, albeit at more modest levels while US investors in particular seek higher-yielding assets.

The chart above reflects the impact ETF exposure has had on the underlying gold price. While it is difficult to quantify when investors have taken profit, we look at the scale of holdings added in 2009, which saw 674 tonnes at an average price of $973 per ounce, as potentially vulnerable.

 

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