Pressure on gold prices is building…
Over the last few days, the sell-off in gold prices resumed and even gained pace. The weaker than expected US economic data at the end of last week resulted in financial markets positioning for a dovish Fed this week. Usually this is great news for gold and precious metals. But this time around, the adjustment in expectations only resulted in a relatively small recovery in prices and this recovery was short-lived. The exit of Mr Summers resulted in only temporary respite for gold prices. This can be explained by lower safe haven demand, with calmer emerging markets following lower US yields and a reduced risk of escalation in the Middle East (see chart). In addition, expectations of physical demand from Asia for the second half of this year have also been adjusted downwards. The fact that gold prices came under pressure again on Monday, despite the weakness in the dollar, is a strong sign that the bottom may be pulled out under gold prices again in the near-term. At the moment, the 1,300 USD/ounce level is giving some support, but once this level is taken out the next level is 1,273 USD/ounce.
… with more downside on the cards
We remain negative on the outlook for gold prices in the coming quarters. A combination of strong US growth, constructive investor sentiment and subdued inflationary pressures in the advanced economies will be a negative cocktail for the metal. The sell-off in gold prices will have a negative spill-over effect on the other precious metals where investor position liquidation will push prices lower and dominate the impact of a stronger global economy.