Precious Metals Weekly – Chinese demand support

by: Georgette Boele

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  • Chinese gold demand optimism supports gold prices…
  • …as did a lower US dollar, weaker US data and some debt-ceiling uncertainty
  • Gold has lost some of its safe haven appeal…
  • …while prices of gold will move lower on stronger US data and a stronger USD

Chinese gold demand optimism

Since the Chinese consumers and investors have returned from their New Year celebrations, the upward momentum in gold prices has increased. The market has confidence that they will buy large amounts of gold again this year after a strong year last year. Moreover, an FT article about a 500-tonne gold gap in China’s gold consumption data fuelled talks that the central bank also bought gold last year and may do so this year as well. All in all, the market has become more optimistic that Chinese gold demand may be able to push gold prices higher this year.

Other drivers also support gold prices?

Gold prices also received support from a weaker US dollar, weaker than expected US economic data, such as the ISM and US Employment reports, and temporary concerns about the US debt ceiling. As a result of all the above-mentioned drivers, the market was able to clear the USD 1,275 per ounce technical resistance level. Overall, the technical picture has improved and the next near-term resistance area lies at 1,305-1,312. The long-term resistance comes in at USD 1,361 per ounce.

What was the impact of Yellen’s testimony?

Ahead of the release of the new Fed Chair Janet Yellen’s testimony, financial markets had anticipated that she would sound more dovish, because of the recent uncertainty in emerging markets and weaker US data. In fact, she stuck to the view on the outlook despite economic data disappointments and EM wobbles. She stroke a relatively positive tone and suggested that tapering will continue. As a result, gold prices moved lower. However, they quickly recovered again and prices were pushed beyond USD 1,290 per ounce before stabilizing.

Safe haven appeal?

One of gold’s appeals is its safe haven characteristic. Traditionally, gold prices receive support in an environment of market panic and concerns about inflation, politics and state of the economy. The relationship with, for example, the equity volatility index (VIX ) has been strongly positive in periods of risk aversion. In recent years, this positive correlation has diminished and recently it even has turned negative. We judge that gold has lost some of its traditional safe haven appeal, because it trades more as a speculative asset than it did ten years ago, which is mainly the result of the opening of gold market to the wider public. More recently, financial markets have been relatively calm so other drivers have taken over, such as expectations about Chinese demand. As the relationship with US equities remains very negative, we judge that if the overall sentiment on the US improves driven by stronger US economic data, the relationship between gold and equity volatility will turn positive again. In this environment, also the US dollar and expectations about US interest rates will move higher, pushing gold prices lower. We judge that the good start of the year for gold, being the best performing precious metal (+7%), will soon come to end.