Precious Metals Weekly – Focus on Fed speak

by: Georgette Boele

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  • Gold remains under pressure, following good US economic data
  • Conditions in the gold market have eased: the forward price is again higher than the spot price
  • Investors continue to have a tendency to sell

Why is gold moving lower?

Since the end of October, gold prices lost USD 100 or about 7%. The slide in gold prices was mainly the result of the recent stronger-than-expected US economic data. In earlier reports we indicated that gold prices are very sensitive to the state of the US economy. A stronger economy increases the risk of an earlier or more aggressive Fed tapering. As a zero income asset, this has hurt gold. Even though in the coming days, a lot of Fed officials will speak on various subjects, Yellen’s testimony today will take centerstage. She will testify before the Senate Banking Committee regarding her nomination to become the next Fed’s chairman. Her statement was already released and the market has translated this as dovish. So gold prices have bounced slightly higher. What will be more interesting if her comments in the Q&A session match the current dovish expectations. If her comments are equally or less dovish, gold prices will fall under pressure again. Moreover, a stronger US economy will also increase the attractiveness of US assets, such as equities, which have a positive exposure to the US economy. Gold, however, does not possess this attribute.

 

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Is the gold market tight?

At the start of this month, the gold market was tight. This was manifested in a high premium that buyers were willing to pay on top of the spot price and also by the spot price being higher than the forward price for up to three months. This was mainly a reflection of tight supply in India, because of the measures taken by the government. Even though gold buying for the Diwali festival is behind us, higher gold demand for Thanksgiving and Christmas is also common. This is a widely anticipated seasonal effect though. Overall, we believe that conditions in the gold market will not tighten significantly over the coming weeks. Therefore they will unlikely limit the downside.

Are investors still selling gold?

Investors have reduced net speculative positions again. This reduction follows two weeks of increases. Investor position liquidation remains a negative force on gold markets. One thing to keep in mind is the overall technical outlook for gold prices. The longer-term outlook remains bearish, below USD 1,525 per ounce, and the pressure on the near-term support, layered at 1,252 per ounce, is increasing. The risk has increased that gold prices will close below our year-end target of USD 1,300 per ounce. The direction will clearly be toward lower gold prices over the coming years.

 

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