On the back of strengthening of the U.S. dollar, the lack of growing inflation expectations, as well as low physical and investment demand, the gold price may fall below the U.S. $1,200 per ounce level in the fourth quarter of 2014.
In the past quarter, the gold was in a moderately negative trend, as we expected, and did not breech the level of $1,200 per ounce, however, it was close to it. In the third quarter, gold price decreased by 9%.
The price was under pressure of the strengthening U.S. dollar and continued geopolitical tensions, as well as seasonably weak demand for gold. "The printing machine" in the U.S. is about to close, at the same time, the affect of the quantitative easing (QE) program, as well as of the "Ukrainian factor" is already in the quotes, and the possible growth of the interest rates in the U.S.
Yelena Lysenkova, chief analyst at Globexbank, noted that the main driver affecting gold in the fourth quarter will be still the U.S. monetary policy. "Expectations of the QE curtailment and possible tightening of the U.S. monetary policy had already forced investors to shift their investments from gold", Lysenkova said.
LACKING DRIVERS FOR GOLD
According to experts, there are less and less preconditions for gold price growth now.
Andrei Shenk, analyst at Alfa-Capital, considers that there are no fundamental reasons for gold price growth in the fourth quarter. "Investment demand will remain weak, while the seasonal demand for gold is likely to appear in the first quarter of 2015. We need increased inflation expectations for investment demand to grow. Currently, we see the reverse process globally. The planned increase of the interest rates in the U.S. also provides no optimism. In the medium-term, we will see short term outbreaks of price mostly due to seasonable factors", he said.
Ivan Fomenko, head of the trust management department at Absolut Bank, has a similar view on the situation. "The growth of risks or the gold deficit is needed for demand to increase. As of now, the lack of threats pressures the price. There is no inflation, but gold was considered as a hedge against inflation, that is why we should not expect any support", Fomenko said.
Oksana Lukicheva, analyst at Otkritie Bank, also mentioned several factors, which prevent from estimating the real demand.
"It is bad that the mine production continues to grow, and it pressures the physical market, but, it is possible that low prices will lead to lower output already this year. However, China does not care. To my mind, all the official documents do not demonstrate two things, which significantly reduce the physical demand, namely illegal gold supplies to India and creation of alternative financial system at Shanghai. Moreover, the International Monetary Fund has no exact information on the amount of gold in Chinese FX gold reserves, which may be significantly higher the reported 1,054 tonnes", Lukicheva said.
As for the seasonable factors, the fourth quarter is commonly the strongest quarter in the year by the demand, because of the Diwali festival in India with the purchases falling on October 25 until November, as well as the purchases ahead of the Lunar New Year in China, with the active purchases from December to February.
PRICE
The current moods of the speculative buyers, as well as opinions of the bulk of analysts about the gold prices are mostly bearish. The experts are similar in view that gold price may soon fall below the level of $1,200 per troy ounce, however, the decrease is not likely not be continuous, because it is a significant support level and the level of production costs for the large amount of gold mining companies, mostly foreign companies.
Fomenko from Absolut Bank considers that the price is likely to continue decreasing. "There are less and less factors, which may support gold quotes. We are expecting gold price to decrease below $1,200 per troy ounce, because neither geopolitical issues, no inflation is capable of impacting the gold price dynamics, while the economic recovery in the U.S. and globally pressures the metal", Fomenko stated.
Shenk from Alfa-Capital also noted that we are likely to see gold price falling below the $1,200 per ounce level in the lack of investment demand and continuous strengthening of the U.S. dollar. "It is more likely that the gold price will be traded $1,100-1,200 per ounce. However, the range may not be stable. The analysis of the ETF gold volumes demonstrates that a significant volume of positions was created in this range, thus the liquidation of some of the positions may lead to a new waive of gold price decreases", the analyst said.
Confirming the outlined trend, Lysenkova from Globexbank added that the price may fall below $1,200 per ounce amid the overwhelming bearish moods among large gold market players, as well as in the lack of stable physical demand from Asia.
However, there is a sign of a positive opinion among the others. For example, Lukicheva from Otkritie Bank does not think the price will fall below $1,200 per ounce, because this is the level of the most of gold producers' production costs.
"While reaching the level of $1,200 per ounce, the market gains strong support from the physical demand. As of September 24, according to our model, gold price is likely to grow in the fourth quarter in line with seasonality and may reach the level of $1,300", the analyst added.
ATTRACTIVE METAL
The gold, as the investment instrument, should not be discounted, according to head of research department at Nord Capital Vladimir Rojankovsky. The expert came to a conclusion that there is a number of preconditions for gold price growth to the level of $1,320 per ounce by the end of 2014.
"Despite the slow "cooling" of gold within the last months, the compound annual growth rate (CAGR) from January 2001 to December 2013 amounted to 12%, which does not look bad for passive accumulation", the expert said.
Rojankovsky also highlighted that gold was able to withstand "attacks" of the U.S. dollar, which was strengthening recently, but its growth comes to an end. In comparison with oil, gold demonstrates less correlation against dollar, thus showing reassuring independence than its "black sister".
"Taking into account the above-mentioned factors, it looks like that gold is starting to recover from levels of its graphically clear oversale… more and more factors show that gold price may soon start the movement against the trend", Rojankovsky said.
Lukicheva from Otkritie Bank also considers that commodities will soon be in demand, but it will depend on global inflation level and changes in the financial system.
"Investors are mostly fixing their positions and shift their capital into more risky assets. In any case, I do not think that the gold price will remain for long below the $1,200 per ounce level. Real percentage rates will be negative for a long period of time in the U.S. and it will support precious metals prices", Lukicheva noted.
Rojankovsky mentioned one more argument for gold price growth, which lies in its economy. "In the past, when a price of one troy ounce was close to the level of self-sufficiency of its mining and sale, a great support was seen. Even in the rare events, when gold price breeched these important technical and economic levels, it was not in condition to remain there for long", the expert added.
Former head of the U.S. Federal Reserve Ben Bernanke said ones that "nobody clearly understands the nature of gold" and that gold is not a common asset. Actually, the nature of gold is that it is more cyclical that any other assets and is more sensitive to the categories of the demand sources - currently Chinese and Indian customers. However, it is very important that gold reacts better to classical price drivers, firstly demand-supply-exchange stocks. In this case, gold is one of the common assets, which is surrounded by deformed evaluating paradigms of the market, Rojankovsky also said.
Summing up the above mentioned opinions and proposed variants of the gold price development, we came to a conclusion that gold price is likely to fall below the level of $1,200 per ounce for a short period of time. At the same time, it may happen only within one and one and a half months of the fourth quarter, followed by upward correction. After that, we expect the gold price to come closer to the level of $1,300 per ounce in the absence of new pressuring factors.
On the back of strengthening of the U.S. dollar, the lack of growing inflation expectations, as well as low physical and investment demand, the gold price may fall below the U.S. $1,200 per ounce level in the fourth quarter of 2014.
