Gold price descends, demand freezes in summer lethargy
In the third quarter of 2013, gold will continue its downward trend with price fluctuations in the range of U.S. $1,100–$1,300 per ounce amid a continuing outflow of funds from exchange traded funds (ETF), investors’ uncertainty in gold and expectations of a meeting of the U.S.’ Federal Reserve System (Fed) slated for September.
Fed chairman Ben Bernanke’s speeches have recently become very important for the commodities markets and are immediately used by speculative players. It is clearly seen in the precious metals market, especially after news on a possible curbing of the country’s stimulus measures, such as the third round of the quantitative easing (QE3).
ABOUT QE3
QE3 was announced in September 2012. The Fed decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency backed- mortgage securities. In December 2012, the Federal Open Market Committee (FOMC) announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.
In June 2013, Bernanke’s latest announcement confirmed the rumors of a possible end of the QE program and again led to a panic on the global markets, despite the expected turn of events.
Bernanke said the Fed would likely begin to curb its stimulus measures later this year if the U.S. economic outlook improved sufficiently. He also said that the program might be closed in mid-2014. The news hit gold prices the next day forcing it to fall below the significant support level of $1,200 per ounce. For the first time in almost three years, gold price slumped to below $1,180 on the NYSE Comex division in late June.
CAUSES OF GROWTH/FALL
The second quarter was the worst for gold in trading history, Ivan Fomenko, portfolio manager at Absolut Bank, said.
“The decrease was more than 20%, and as a consequence we saw a significant growth in volatility, which gives no optimism to investors. Moreover, investors have started to contemplate the attractiveness of U.S. stocks, which demonstrate high profitability. At least, these two factors are forcing the market players to reconsider their attitude towards gold, whose share grew significantly in 2009–2011. Increased investments in gold, as a safe haven asset, were based on three principles, namely anti-inflation measures, and precautions against geopolitical disturbances and financial fluctuations. None of these precautions proved to be true… in reality, they did not lead to any destructive consequences. The next factor is the connection of gold with the growth of the global money supply, and namely pumping the economy with Fed and ECB (European Central Bank) money. It had only an indirect impact on growth of the gold price, because it intensified the expectation of an inflation acceleration. However, this scenario also failed to develop. As a result, we saw a sharp decline in gold prices,” Fomenko said.
In late June, gold prices were mostly decreasing with insignificant periods of an upward corrections. The announcement on a possible offend to the “never-ending” QE3 program dropped gold prices amid the strengthening of the U.S. dollar and the U.S. economy on the whole. However, there were assumptions that the program might not be immediately cut after the release of data on the U.S.’ gross domestic product (GDP) growth. The data for January–March proved to be less positive than market experts expected, as GDP growth was 1.8% instead of 2.4%, which returned some optimism to the market, who feared an immediate end of QE3. The slower economic growth in the U.S. may shift the closure of the stimulus program to a later date, and gold will again have the QE as a supporting factor for a possible growth.
Dmitry Mikhailov, portfolio manager at Renaissance Asset Management, highlighted that the U.S.’ economy is on the rise, which can be seen “with the naked eye.”
“In comparison with the U.S., the rest of the world (Europe, Latin America, Southeast Asia, Russia) unfortunately, continues to stagnate. As a result, we see a reduction in Fed stimulation measures, a strengthening U.S. dollar, decreasing commodities prices and less inflation worries. All these factors do not provide support for a gold price growth. On the contrary, these factors together led to a significant slide in the price (over 30% from October 2012). In the immediate future, the situation is unlikely to change. The trend of the U.S. economy’s recovery is unlikely to exhaust itself in the coming months, while other regions of the word will most likely not shift from stagnation to growth. Thus, all the highlighted factors remain, and it is too early to talk about changes to the downward trend of gold prices ,” Mikhailov said.
DEMAND
Oksana Lukicheva, analyst at Otkritie, said that the demand for gold remains seasonally weak in the summer.
“Nothing really new happens on the market. The market lives on the expectation of September’s Fed meeting. Investment demand continues to fall, while the physical demand stands still during the lethargic summer period,” Lukicheva said.
The outflow of funds from gold ETFs, which was triggered in late 2012 by largest investors, George Soros and Louis Bacon, still continues. For the second consecutive quarter, the outflow from ETFs totaled 313 tonnes, and almost 500 tonnes to date. It is one of the key reasons for the drop in the gold price.
At the same time, the physical demand from different countries softens the outflow’s impact. Unfortunately, it does not provide the needed support to gold prices. India and China are the major gold consumers, with the latter trying to overcome its previous records of gold consumption this year.
In 2013, China expects its gold consumption to amount to about 1,000 tonnes amid India’s goal to reduce imports this year by fighting the negative balance sheet. India increased the import duty for gold to 8% from 6% amid a widening the current account deficit, but the country is unlikely to cut the demand amid the falling gold prices.
In 2012, gold demand totaled 864 tonnes in India, and 776 tonnes in China.
According to Marcus Grubb, managing director of the World Gold Council (WGC), active gold purchases by central banks along with the demand tendency in China is a bright spot for the physical metal market.
“We are seeing a record demand from the central banks this year. Currently, the purchases stand at about 40-50 tonnes monthly, so it may reach 400 tonnes by the end of the year. The recently published International Monetary Fund’s (IMF) statistics showed that the most active purchases were made in Central Asia, Russia, South Korea and other central banks around the globe. For the central banks of developing countries, gold is a perfect instrument for hedging. I think that many investors see that the central banks are continuing gold purchases despite falling prices,” Grubb said in an interview with Russia-24 TV channel.
FORECAST
Most analysts expect gold price to continue with the downward dynamics in the coming months with short periods for correction and growth with the help of speculative players. With stagnating European markets, the number of factors for the drop in the gold price significantly exceeds the amount of positive drivers.
“The most optimistic scenario envisages a consolidation in the range of $1,150–$1,250 per ounce. According to the negative scenario, the gold price may fall to $1,000 level. It is unlikely, but it is more possible that a return to a level of $1,400 per ounce,” Ivan Fomenko from Absolut Bank said.
Investcafe Analyst Andrei Shenk expects the gold price to strengthen its position in the third quarter.
“Firstly, gold mining companies will review their investment programs by delaying the launch of new production capacities, which will lead to decreased production forecasts, and consequently, to a favorable background for the fundamental price growth, because the demand remains high and overproduction is not expected. Worries only remain about China, which is keeping its plan to increase production by 10% in 2013, but even they are likely to come to terms that aiming for a recovery in prices. There are also rumors that the ECB may launch a program similar to QE, which may possibly warm interest to gold. As a whole, I expect gold (price to be) in the range of $1,100–$1,400 per ounce level,” Shenk said.
Yulia Oniximova, BFA Bank analyst, provided a narrower range for gold price expectations. “In the third quarter, the fall in price is likely to be less significant. If these dynamics remain, we will see gold price consolidating in the range of $1,080–$1,180 per ounce. If the U.S. again releases new pessimistic data on its stimulus measures’ program or China announces weaker economic expectations, gold may fall lower to $1,030–$1,050 per ounce, to historical supporting levels,” Oniximova said.
As a result, we expect the gold price to fluctuate in the range of $1,100–$1,300 per ounce in the third quarter with a very small possibility of growing to $1,400 level, due to the lack of significant supporting factors and taking into account seasonable factors. By the end of the third quarter, the market will see a growth in physical gold demand, mainly due to wedding and religious festivals in India starting in August. As for the gold’s safe haven status, the metal is unlikely to regain it in the medium-term perspective because investors fear new sharp fluctuations in price. At the same time, the gold price looks rather attractive as an instrument for long-term investments.
In the third quarter of 2013, gold will continue its downward trend with price fluctuations in the range of U.S. $1,100–$1,300 per ounce amid a continuing outflow of funds from exchange traded funds (ETF), investors’ uncertainty in gold and expectations of a meeting of the U.S.’ Federal Reserve System (Fed) slated for September.
