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ANALYSIS |
 After the turbulent growth of gold price in the end of the first quarter amid increased geopolitical tensions in Ukraine, as well as expectation of introduction of serious economic sanctions against Russia by the western countries, the period of consolidation came, as we expected earlier.
When gold exceeded a level of U.S. $1,350 per ounce, traders had started to close their positions in order to fix profits. At the same time, the most active buyers from China cut sales amid high gold prices in March.
UKRAINE
The influence of Ukrainian factor on gold price started to weaken after March 16–18, particularly, after the Crimean referendum, which resulted in signing of an agreement on Crimea and Sevastopol accession into Russia. The market was preparing for the worse scenario, however, it did no happen.
“The impact of the Ukraine events already fades, and we now see reverse processes. Prices started to correct, however, under my estimates, gold price will not fall below $1,250 per ounce within April”, said Investcafe analyst Andrei Shenk.
Yelena Lysenkova, chief analyst at Globex bank, also said that the Russia-Ukraine conflict had already passed the critical stage, but the question about possible sanctions against Russia remains open.
“We consider the gold price now to be defined by the U.S. monetary policy, interest rates forecasts, as well as the U.S. dollar fluctuations”, she added.
Ivan Fomenko, head of trust management department at Absolut Bank, added that this geopolitical factor had already been played out by the market. “We see a decrease in prices to the level of mid-February. We consider that the conflict in Ukraine will not be continued and diminish”, he said.
CHINESE DEMAND
China is, traditionally, the main driver for gold prices, because it is not only the major gold producer in the world, but also the main consumer.
Shenk from Investcafe also blamed serious weakening of yuan against the U.S. dollar in March gold price decline. As a result, gold prices became not attractive for Chinese investors and purchases decreased.
Vladimir Bragin, director of financial markets and macroeconomic analysis department at Alfa-Capital, said he was worried for gold price to drop below $1,200 per ounce, where significant positions in ETF were formed, which might result in further decline.
“Nevertheless, gold price managed to find support in China, where the demand for the physical metal as an instrument against risks is reportedly increasing, as well as in India, where jewelers obtained an opportunity to increase the reserves amid falling gold prices”, he said.
In his turn, Fomenko from Absolut Bank said that China is increasing or decreasing purchases, depending not only on gold prices.
“Currently, industrial production in China declines, which may result into deceleration of economic development, and the country may need funds for new stimulating programs. That is why, China needs gold not only for diversification of reserves, but also for other purposes”, he added.
ETF
Gold ETFs became one of the major reasons of gold price collapse in 2013. In the first quarter, the market saw first inflows in these funds, after continuous outflows last year.
Vladimir Rojankovsky, head of research at Nord Capital, said that gold and silver are the only commodity futures, which are still trading on macrostatistics, news, geopolitical issues and other factors, aside fundamental ones.
“The only nuance is the active phase of gold ETFs’ deleverage, which prolonged influence pressured on gold price. Judging from the fact that the largest ETF - SPDR Gold Trust - registered first inflows, I may suppose that the above-mentioned deleverage process came to an end. If it is so, gold price will be largely influenced by the U.S.’ FedReserve monetary decisions and geopolitical issues”, Rojankovsky added.
Bragin from Alfa-Capital also highlighted that the volume of gold in ETFs was increasing in the recent months, which had not been seen since early 2013.
“This may be connected with the growing risks in the world economy amid high geopolitical tensions, as well as due to stabilization of gold prices. But, it is more likely that we see no significant growth in gold prices, because it had not yet returned the status of fast-growing asset”, he added.
U.S. & QE
The influence of the quantitative easing program (QE) of the U.S. FedReserve, which was created to stimulate the country’s economy, is gradually weakening. According to Jannet Yellen, new head of the FedReserve, the tapering of the QE program goes on plan by $10 billion a month.
According to experts, only the change in these plans may put pressure on gold prices.
“As for QE, I should mention, that the Yellen’s statements carry particular character. Particularly, the terms of the QE tapering had already been defined - by autumn 2014, and already in six more months we will see growth in interest rates. From the one point, the forecasts are already included by the market in a price of the metal, from the other hand, the earlier tapering of the QE may pressure on gold prices amid risks of lower inflation expectations”, Shenk from Investcafe said.
DRIVERS & FORECASTS
As geopolitical issues had exhausted and Russia had not received any significant economic sanctions from the western countries, one of the main drivers for gold price growth will be the recovery of the U.S. economy and deceleration of Chinese economy, besides the fundamental factors.
Shenk also said that investors will use inflation expectations for gold purchases, which will remain low in the current conditions (decrease of inflation in the euro-zone and QE tapering in the U.S.). “It means that gold has no potential for growth above $1,350 per ounce. My forecast for the second quarter if the fluctuation between $1,250 and $1,350 per troy ounce”, he added.
Yelena Lysenkova from Globex bank expects physical demand in China to support gold price in the second quarter. “Additionally, gold purchases by central banks, and stable consumer, investment and jewelry demand, as a whole, will provide support for the metal”, she added.
Oksana Lukicheva, analyst at Otkritie bank, added that some support will be provided by India, where five banks were allowed to import gold, which provides for a possible growth of gold supplies to India despite imposed duties.
The decrease in gold price to $1,250 per ounce is possible only after significant strengthening of the U.S. dollar. But in 2014, we can not expect such growth due to large repayments on bonds, she said.
SUMMARY
In the first quarter, gold was traded above the experts’ expectations mainly due to situation in Ukraine, which could not be predicted earlier. Forecast for the second quarter stands at $1,250–$1,350 per ounce with a minimal risk of falling or rising beyond the corridor and only in case of force-majeure circumstances.
End
09.04.2014 12:11
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