- Gold recovers after US employment report…
- …we judge that this recovery will prove to be temporary
- …and weakness will return in 2014 and 2015
What was gold’s reaction on better US employment data?
Gold prices fell under pressure in the minutes after the release of the better-than-expected US employment report. This was completely in line with our view that better US economic data make gold less attractive to invest in, because growth sensitive and higher income assets become more attractive. What caught us by surprise what the strong recovery afterwards. This could have been a sign of lower investor appetite, because of a higher probability of a December Fed tapering. In fact, this proved to be incorrect as emerging market currencies and other financial markets shrugged off fears about tapering, as the confidence in the global economy increased. So investor appetite improved, but gold prices did not move lower.
So what is really going on?
Investors have been trying to push gold prices towards this year’s low of USD 1,180 per ounce and to even force a break of this level. When they realized that they would not be successful in doing so, they quickly closed some of their short positions resulting in a gold price recovery. This short covering/position closing has continued and prices may even keep going up until the end of this year. The lower year-end market liquidity could result in larger-than-usual moves. Furthermore, China’s demand for gold has picked recently, which was visible in China gold imports via Hong Kong (see graph above). In addition, market conditions have tightened. This has manifested itself in the spot price being above the price in the near future and reports in India that customers are willing to pay a higher premium for physical gold on top of the gold market price. All these developments point into the direction that the pressure on gold prices has eased temporarily.
Our outlook for 2014 and 2015 is unchanged
We expect investment demand to be in the driver’s seat and position liquidation to continue in 2014 and 2015. More attractive returns on other investments, outlook for lower prices, an environment of low inflation risk and positive investor appetite will result in investors reducing gold positions. Indian’s jewellery demand will likely remain weak. We expect Chinese jewellery demand to increase modesty but it will unlikely compensate for India’s shortfall. We keep our year-end forecasts for 2014 and 2015 at USD 1,000 and 800 per ounce, respectively.