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Commerzbank: Price recovery taking its time


Precious metal prices are likely to experience two distinct phases in 2015: the increasingly imminent interest rate turnaround in the US should drive prices down slightly in the first six months of the year, while Commerzbank expects to see rising prices in the second half because the negative impact of the rate hike cycle will become less pronounced once it is actually underway. Gold and silver prices are then likely to increase in tandem, the bank said in the report.

GOLD

The gold price is likely to be strongly influenced by the forthcoming turnaround in US interest rates next year. Our economists expect that the US Federal Reserve will begin raising its key rates in the second quarter of 2015. Consequently, our currency strategists believe that the US dollar will further appreciate. The effects on the gold price of the ECB’s government bond purchases – which our economists expect to begin from the first quarter of 2015 – are not quite as easy to predict. They are likely to weigh on the euro, though the ECB’s “money printing” could also give a boost to demand for gold as a store of value, especially in Germany and other stability-oriented Eurozone countries. What is more, the value of the euro will be diluted by the anticipated rise in the ECB’s balance sheet. This would result in an increase in the gold price in euros, which would help to cushion the negative impact of the euro’s depreciation on the gold price in US dollars. Physical demand will have to pick up if the gold price is to climb again next year. According to figures from the World Gold Council, the third quarter of 2014 saw physical demand decline to its lowest level in nearly five years, China in particular being responsible. The slump in gold demand in China was certainly one of the biggest negative surprises of 2014. In the four quarters up to and including September, demand for jewelry, coins and bars in China was 27% lower than in the corresponding period a year earlier – in the third quarter it was even down by a full 37%. Part of this collapse is doubtless attributable to the enormously sharp rise the previous year, where presumably some purchases were brought forward. That said, the latest data from Hong Kong suggest that gold demand in China is beginning to revive. Gold imports from the former British crown colony recently rose in three consecutive months and in October achieved their highest level for seven months. Commerzbank envisages greater gold demand again in China next year, probably climbing to 1,000 tons after what looks set to be less than 900 tons this year.

Gold demand also declined noticeably in India this year. In the four quarters up to and including September, it was down by 18% on the corresponding period last year. Admittedly, the third quarter did see a sharp 60% year-on-year surge in jewelry demand, driving total consumer demand up by 39%. However, the increase can be explained for the most part by the very weak previous year’s quarter, when gold demand collapsed following the introduction of gold import restrictions and very buoyant demand in the preceding quarter. Indian gold imports were likewise robust in October and November. The unexpected loosening of the import restrictions by the Indian central bank at the end of November could lend further buoyancy to Indian gold demand. The bank’s analysts therefore expect Indian demand in 2015 to somewhat exceed the figure of 850-900 tons envisaged this year.

The headwind from ETF selling should further abate in 2015. Holdings in gold ETFs are expected to decline by 150-200 tons in the year that is now drawing to a close, as compared with a decrease of nearly 900 tons last year. As volatility on the equity markets increases significantly, investors are likely to show growing interest in safe haven assets, meaning that their willingness to switch from gold to equities will dwindle accordingly. Even this year gold ETFs were observed to record interim inflows, especially when prices fell sharply on the equity markets. From the second half of the coming year, lasting net inflows are conceivable once again.

Central banks were net purchasers in 2014 for the fifth consecutive year, buying 324 tons of gold on balance in the first three quarters of the current year. Last year’s purchasing volume of 409 tons in total thus appears achievable. The central banks of emerging economies are also likely to continue topping up their gold holdings in the year 2015, while the central banks of western industrialized countries will probably sell hardly any more gold. That said, the Swiss National Bank will not become a major gold purchaser now that the Swiss Gold Initiative met with a resounding No vote in the referendum.

Commerzbank expects the gold price to remain under pressure initially in the first half of next year on the back of growing speculation about increasingly imminent interest rate hikes in the US. The gold price is likely to bottom out at the onset of the cycle of rate hikes in the second quarter. The bank’s analysts envisage the price falling to $1,125 per troy ounce on average in the second quarter, though a gold price of below $1,100 is also conceivable for a time. Once the interest rate hikes are underway, the pressure on the gold price is likely to abate, as was the case during the Fed’s last series of interest rate hikes between 2004 and 2006. This is because interest rates can be expected to rise at the same pace as they did 11 years ago, that is to say in moderate steps of 25 basis points per meeting. By the end of 2015, the gold price should climb to $1,250 per troy ounce, finding support from reviving demand in China and inflows into gold ETFs. Any deviation by the Fed from this assumed course of action poses the greatest risk to this forecast.

SILVER

The silver price next year can be expected merely to move in harmony with the gold price despite currently being at its cheapest level relative to gold for nearly six years. Unfavorable fundamental data argue against any better performance of the silver price. According to Thomson Reuters GFMS, physical silver demand in the year now ending is 6.7% or 72.5 million ounces (2,255 tons) lower than last year, primarily due to a 50 million ounce slump in demand for coins and bars. Industrial demand is set to decrease by 10.5 million ounces and demand for silver jewelry and silverware by a total of 12 million ounces. The supply side looks relatively stable despite the sharp fall in price and low price level. Thomson Reuters GFMS estimates that global silver supply in 2014 will grow on balance by 2.9% or 28.9 million ounces (899 tons). This is attributable above all to mining production which looks set this year to reach a new record high of 867.7 million ounces (26,986 tons). One role is played in this by the fact that silver occurs for the most part as a by-product in the production of other metals such as gold, copper, zinc and lead, meaning that the silver price is not of any great significance to most producers. This increase in mining production by 29.7 million ounces is offset by an almost equally large 27.2 million ounce decline in silver scrap. The resulting 26 million ounce oversupply on the physical silver market could not nearly be absorbed by inflows into silver ETFs.

Boosted in part by its attractive price as compared with gold, demand for silver coins and bars should see a marked recovery. This is also indicated by statements by Thomson Reuters GFMS which report a perceptible revival in coin and bar sales since September. For the fourth quarter of 2014, Thomson Reuters GFMS envisages 30-40% growth in demand for coins quarter-on-quarter. There is still little in the way of impetus to be expected from industrial demand, on the other hand. Economic growth in China will continue to slow next year, which is also likely to put the brakes on industrial demand for silver. Silver demand in photovoltaics will be driven down by the continued reduction of silver in solar cells.

The photographic industry’s share of industrial demand is likewise expected to continue declining. Although Thomson Reuters GFMS envisages rising silver demand in medical applications, these account for only a small proportion of industrial demand. Jewelry demand could profit from the favorable silver price and the resulting substitution effects, while on the supply side a slight slowing of mining production growth is anticipated. At the present low price level, the supply of silver scrap is hardly likely to increase at all, meaning that the primary surplus from supply and physical demand in 2015 will probably be somewhat smaller and absorbed by ETF inflows. This should prevent any renewed underperformance as compared with gold. Commerzbank expects to see a silver price of $16 per troy ounce by mid-2015 and $18 per troy ounce by the end of 2015.

End

17.12.2014 20:29


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