Global gold prices have fallen by 10% in 2014, but demonstrated a turbulent growth in the beginning of 2015 amid the new decision of European central banks, as well as geopolitical situation, which both raised investor interests to safe assets, namely gold and U.S. government securities. Despite the favorable beginning of the year, the market experts do not expect gold prices to increase further in the first quarter of the year.
2014 TENDENCIES
Last year was as tough for the “yellow” metal, as well as the past 2013, however, the most pessimistic forecasts of various analysts, who expected gold prices to drop to U.S. $1,100 per ounce and lower, did not come true. The highest average price of the precious metal reached $1,336 per ounce in March, while the lowest totaled $1,176 per ounce in November.
Speaking about gold mining companies, the current gold price satisfies most of Russia, as well as a bigger part of foreign companies, because the average total cash cost of these companies amounts to between $700-900 per ounce.
As for the tendencies of the year in the sector, firstly, it was an intention of central banks to increase their gold reserves and repatriate their gold reserves back home. In other words, the repatriation tendency got another impulse. At the same time, it is not an easy task to bring back the gold reserves. The problems include the practical aspects of gold transportations and particularly, the security issues. After the return of gold, it is necessary to set up an up-to-date security system.
The Swiss referendum over “gold initiatives” last year obtained a wide response, whose outcome could resolve the future of the central bank’s gold reserves. In case of positive outcome, the central bank would have to repatriate all gold reserves and increase its share in the foreign exchange and gold reserves to 20%, among others, but it did not happen, because the majority voted against the initiative.
Repatriation was also one of the key issues for Holland and Germany, while Belgium and France were considering this question. The idea of repatriation takes more and more countries, and it means the decreasing level of trust to the global financial system amid the worsening of the global economic situation.
Speaking about the banks’ gold reserves, global gold reserves increased by 0.9%, or about 280 tonnes, to 32,099 tonnes, while the biggest growth was registered in Russia. Monetary gold reserves of Russian central banks increased by 16.5%, or 171 tonnes, in 2014 to 1,206.8 tonnes as of January 1, 2015. At the same time, the exact volume of China’s central bank reserves remains unclear, and overgrows by rumors and theories.
NEW GROWTH DRIVERS
Since the beginning of the year, gold price reached and exceeded the level of $1300 per ounce, proving numerous investors an opportunity to fix profits driving prices down again. Gold price growth was caused by various decisions of the |European central banks, namely the decision of the European Central Bank (ECB) to launch the quantitative easing (QE) program to support the region’s unstable economy.
Additionally, the gold price growth was triggered by Greece parliament elections and the decision of the Swiss central bank to untie franc exchange rate from euro, which became the big surprise for the financial market.
According to Andrei Shenk, analyst of Alfa Capital, the growth of gold price in the beginning of the year was a reaction of the market to changing conditions and decreased demand for risky assets.
“Some reduction in investors’ “risk appetites” have increased the demand for safe assets, however, the amount of such assets became lesser after the decision of the Swiss central bank. In fact, two of them remained, namely the U.S. treasuries and gold”, the expert said.
Oksana Lukicheva, analyst of Otkritie bank, highlighted the continued fixation of profits after the recent growth of gold price and the decrease to the support level of $1,280 per ounce. “The uncertainty about the ECB decision and the Greek votes left the market, which will allow gold to move in line with seasonal factors. These factors usually undermine price decline in the first quarter”, the analyst said.
EXPECTATIONS
Average gold price will amount to U.S. $1,211 per ounce in 2015, according to London Bullion Market Association. LBMA forecast gold price to trade in the wide range of $1,085–1,356 per ounce. Thomson Reuters GFMS forecasts average gold price of $1,180 per ounce in the first half of 2015.
Market experts agree that we won’t see significant gold price growth in the first quarter, while the price will be in the range of $1,200-1,300 per ounce.
Ivan Fomenko, head of trust management department at Absolut Bank, supposes that gold will find support in liquidity, supplied by ECB and the central bank of Japan. “It is possible that other central banks will make similar steps and may take the experience of implementing the QE programs. That is why we think that gold has all chances to strengthen further. The growth in gold price will continue, but will appear with varied results, because there are still enough uncertainty on the market”, Fomenko said.
At the same time, the expert added that deceleration in leading economies, namely negative macroeconomical data, inflation boost, stabilization or gold price dynamics reversion, may keep gold price at the current levels.
According to Yelena Lysenkova, chief analyst at Globexbank, the precious metal will be supported by sooner start of QE program in the eurozone. “Stimulating monetary policy of ECB encourages reduction in profitability of investments in treasuries of EU countries, thus making investments in gold more attractive for conservative investors. The question of increase key rate in the U.S. will be the major factor for golf price in 2015”, she said.
At the same time, the analyst added gold investment demand is likely to decrease if the recovery tendency in the American economy continues.
According to Andrei Shenk, the current volume of physical demand is not enough for deficit to appear, which in turn will lead to price growth. “If the demand for safe assets remains for at least a year, we may see a growth in a price to the level of $1,400 per ounce. But we are not considering this scenario now, because the U.S. economy continues to grow, while a launch of a program in Europe, similar to the QE, ignited demand for risky assets”, he added.
Oksana Lukicheva also noted that seasonable negative factors prevail in the first quarter. “Factors, which will provide support to gold in the first quarter, include only the expected celebration of the New Year in China in February, which may potentially increase demand for gold in China and imports in the country. As for the rest, the seasonal negative factors will dominate”, she also said.
Summing up, the average gold price is forecasted at $1,250 per ounce in the first quarter, taking into account both positive and negative factors.
Global gold prices have fallen by 10% in 2014, but demonstrated a turbulent growth in the beginning of 2015 amid the new decision of European central banks, as well as geopolitical situation, which both raised investor interests to safe assets, namely gold and U.S. government securities. Despite the favorable beginning of the year, the market experts do not expect gold prices to increase further in the first quarter of the year.
