Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Jan 2016.
Below is the Gold report, to download a PDF copy of the full report covering all the metals in pdf form click here.
Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.
Gold – A Comeback?
Gold remained under pressure for a third consecutive year in 2015, falling about 10 percent in a negative macro environment for commodities, namely a stronger dollar and higher US real interest rates. After reaching its lowest level since 2010 in the fourth quarter, we expect gold to strengthen and range between $1,050 and $1,140 in the first quarter. This reflects stronger investment demand, robust central bank buying and solid jewellery demand. But weakness should re-emerge later in 2016, with a possible break below the $1,000 psychological level in the second half due to the resurgence of the monetary policy divergence theme.
Overall trend – Gold prices edged higher in October, peaking at $1,191. But the rally proved short-lived, largely due to investor fears about the start of the US interest-rate rises that pushed the metal to a low of $1,046 early in December for a four-percent quarterly loss.
Investor sentiment likely to improve – The improvement in the US economy in the second half of 2015 fuelled fears over a possible sell-off in gold, triggered by a Federal Reserve lifting rates from the lower bound for the first time in nearly a decade. Investor demand fell accordingly, as evidenced for instance by ETF liquidation of 54 tonnes. After focusing on the timing of US monetary policy firming last year, market participants will rather pay attention to its speed in 2016. Contrary to previous tightening cycles, the Fed faces a very-low-inflation environment, partly driven by falling oil prices, which warrants a shallower path for rate increases. In this context, the dollar should fall, albeit moderately, alongside US real interest rates in the first quarter of the year, exerting upward pressure on gold. As well, heightened geopolitical tensions in the Middle East and other regions in the world should trigger safe-haven flows toward gold, especially if oil prices surge suddenly.
Low gold prices set to boost central bank and jewellery demand – After steady gold accumulation from central banks in 2015, led by Russia and China, we expect the current low price environment to boost central bank buying in the first quarter, particularly in the EMs in light of their strong and steady willingness to diversify reserve assets away from the dollar. Similarly, jewellery demand, especially from Asia, may continue to expand at a solid pace early this year because Asian buyers tend to respond quite positively to gold prices below $1,100 per ounce.
Overstretched speculative positioning could trigger a short-covering rally – 2015 was marked by extremely bearish speculative positioning. Money managers sold a record 324 tonnes of gold on Comex and became net short for the first time since the CFTC started to report its statistics in 2006. The huge fall in the net speculative length in the fourth quarter, which we largely attribute to a stronger dollar and higher US real interest rates, resulted in an overstretched spec positioning. We therefore see a lot of room for a short-covering rally in the first quarter, especially if our mildly bearish view on the dollar and real interest rates proves correct.
But the Fed’s current tightening cycle may warrant lower gold prices later this year – Given our view that the US economy will continue to expand at a moderate pace in 2016 and other major central banks such as the ECB, the PBoC and the BoJ will remain in easing mode, we expect the policy divergence theme to surge again from the second quarter, resulting eventually in a stronger dollar. This would allow miners in EMs to maintain output due to lower local production costs, as was the case in 2015, as well as dampen investor and speculative sentiment. Against this backdrop, tactical investors will be inclined to liquidate their ETF holdings while money managers will be prompted to rebuild some bearish bets, which could, in our view, send gold prices below $1,000 in the second half of 2016.
ETF investors remained net sellers of 54 tonnes of gold for the third straight quarter in the fourth quarter. In 2015, net outflows of 112 tonnes were down from 158 tonnes in 2014 and 889 tonnes in 2013. This suggests that ETF investors are increasingly long-term investors and are relatively less sensitive to lower prices.
Money managers sold 192 tonnes of gold on Comex in the fourth quarter after buying 71 tonnes in the third. In 2015, money managers sold 324 tonnes of gold after buying 197 tonnes in 2014 and selling 225 tonnes in 2013. The net spec length, which reached an all-time low in December 2015, is set to rebound toward normal levels in this quarter, we think.
Gold prices and US real interest rates tend to be negatively correlated (-0.79 in 2015). Higher interest rates, largely driven by Fed tightening expectations, pushed gold prices down in the fourth quarter. But they should remain stable in the current quarter, which could be gold-supportive.
The world’s central banks, net buyers since 2010, continued to purchase gold in 2015 – the acquired a record 175 tonnes in third quarter, driven by Russia (77 tonnes) and China (50 tonnes). Central bank demand is expected to remain robust in the first quarter, most notably in the EMs, partly owing to currently attractive prices.