 |
ANALYSIS |
 Weak physical and investment demand for gold create neutral background and will not allow the metal price to demonstrate significant dynamics in the third quarter, amid the lack of significant support factors, such as inflation expectations and weak economic growth.
As we had forecasted earlier, gold price failed to breech the level of $1,250-1,350 per ounce in the past quarter. Despite the fact that we saw various dynamics in different directions, it did not happen.
GEOPOLITICAL ISSUES
In the second quarter, conflicts in Ukraine and Iraq, among other issues, helped gold prices to grow. However, most of experts said that the Ukrainian factor is already included in price, and cannot seriously affect the price dynamics.
“In case of new outbreaks in geopolitical tensions, demand for gold as a safe asset may increase. We consider that the factors of Ukraine and Iraq had already influenced prices to a wide extent”, Globex bank analyst Elena Lysenkova said.
Ivan Fomenko, head of trust management department at Absolut Bank, also highlighted that the Ukrainian factor became insignificant for gold. “Iranian factor has some impact on prices. The geopolitical instability in Iraq should be taken into account”, he added.
Andrei Shenk from Alfa-Capital is sure that factors of geopolitical instability support the demand for safe assets, but gold and other precious metals are not considered by the market as safe assets now, thus the influence of these factors is limited.
Experts share the opinion that close attention should be drawn to the actions of U.S. government, as well as to perspectives of the U.S.’ Federal Reserve System’s and the European Central Bank’s monetary policies.
At the same time, we do not take into account the quantitative easing (QE), which is close to its completion with monthly cuts of $10 billion. The QE impact is already in prices, however, if the program is suspended and closes ahead of schedule, it will cause some short-term influence on prices.
HIGH INTEREST RATES
According to Shenk, a growing of interest rates in the U.S. may bring a bigger impact on prices, because the dependence between the rates and the gold prices is very high. If gold prices grow, investors will switch from gold to assets that are more profitable.
Jannet Yellen, head of U.S. Fed Reserve, announced the possible increase of interest rates in the beginning of the year along with the plan to close the QE program by this autumn. Since that time, various experts around the globe are forecasting growth of interest rate before 2015. At the same time, it became clear from the recent Yellen’s comments, that the U.S. has no plans to force hand.
The Fed Reserve stated that a condition of the U.S. economy is currently improving, but it does not mean that they plan to increase the key interest rate soon.
“The question of raising the interest rates causes a lot of controversy. From the one hand, we see a marked improvement in the labor market, but on the other hand, the level of inflation and negative GDP growth in the first quarter are the matters of concern”, said Ivan Fomenko from Absolut Bank.
Lysenkova from Globex bank added that the QE curtailment and expectations of earlier rate hike might strengthen the U.S. dollar and increase the state bond yields.
“Such a situation will be negative for gold. Moreover, the Fed Reserve expects U.S. economy growth in the second half of the year. If the forecast confirmed, the attractiveness of gold will fade for investors. It may also cause a shift to more risky assets from gold investments”, she said.
NOT THE SEASON
Demand for the physical metal was low within the entire first half of the year. Firstly, demand in India had weakened due to high import duty and high difference in domestic price and the global price. Secondly, the demand shifted to Asia, and China remains the major consumer of the metal, but it is not enough to support the physical demand.
Additionally, the demand in India was under pressure due to weather conditions. The monsoon season delayed, while forecasts foresee rain deficit. The demand for the metal usually depends on the raining season, which goes from June until September. In case of abundant rains, gold purchases may increase, because people in rural areas will be able to gather a good harvest and earn more money. They account for around 70% of gold sales in India, because it is a long tradition of investment, while family gold is inherited.
Central banks continue to replenish their gold reserves, but this factor cannot seriously influence gold prices already.
Shenk said that physical demand remains high, but is it not enough to offset ETF outflows.
ETF gold reserves decreased by 2.2% in the second quarter, Lysenkova added. “But now, the moods of big players become more bullish, if we judge the dynamics of opened long positions and the outlined growth of assets in gold ETF. It should be noted, however, that these moods are very changeable”, she added.
NEUTRAL BACKGROUND
If we consider all the factors that will contribute to the growth or decline in gold prices, we obtain approximately neutral picture, without a clear predominance of a particular dynamics.
Oksana Lukicheva, analyst from Otkritie bank, said geopolitical tensions and the depreciation of the U.S. dollar are the positive factors for gold. "In addition, the U.S. stock market is strongly overbought, which could favorably affect the flow of funds into precious metals from time to time”, she said.
While Shenk believes that the negative factors outweigh: “There are more short-term negative factors - a possible increase in interest rates in the U.S., low inflation expectations, the decline in physical gold demand in China - than positive, which are limited by weak U.S. GDP data for the first quarter", the analyst said.
Experts’ general expectations for the third quarter are also neutrally negative. Most are unanimous in the opinion that the price of gold may fall below $1,200 per ounce.
"We should not wait for noticeable changes, the demand for gold is very low, and if it grows, it will be fully repaid by new supplies from the largest producer - China. Thus, gold does not fell fundamental support, Fomenko from Absolut Bank said. – “We do not expect high inflation, while geopolitical risks have less and less influence. Local conflicts will never become global. At the end of the third quarter, we can expect gold at $1,200 per ounce. "
Shenck from Alfa Capital does not exclude further price drop to $1,200-1,100 per ounce. "Taking into account all the factors, we do not exclude such a decline in the medium term. Such support factors as strong physical demand in China is gradually weakening and can no longer cover the outflows from ETF, and a possible increase in interest rates in the U.S. will have a negative pressure”, he added.
Lysenkova from Globex bank is more optimistic about the third quarter. The analyst expects $1250-$1300 per ounce of gold, while Lukicheva from Otkritie notes that all the precious metals trend indicators show continued growth, with the highest growth rates to be demonstrated by gold and silver.
SUMMARY
According to Prime Gold, gold prices may decline to down to $1,200 per ounce, without further break below. The range is also limited by growth to $1,350 per ounce, as gold traders will not miss a chance to recoup, that will throw quotes back to the level of $1,300.
In the case of any decisions on interest rates in the U.S., changes in customs policy of India or the new geopolitical outbreaks, we can expect drastic changes in the market.
End
23.07.2014 10:50
|
