Precious Metals Monthly – China in focus

by: Georgette Boele , Maritza Cabezas

Gold investment demand outlook to remain negative and to overshadow an increase in jewellery demand  

For 2014 we expect lower total investment demand for precious metals, mainly driven by more attractive alternatives in financial markets that pay income and that are less sensitive to higher US interest rates and a higher US dollar. Moreover, we expect safe haven demand to wane, because of an overall improvement in investor climate and continued low inflation. We judge that total ETF positions will be cut further again this year. Positions in the futures market were sharply reduced and overall positions are now relatively small. However, speculative investors could turn net short if the gold sell-off restarts again. We judge that the largest risk comes from possible liquidation of bar & coins demand. We expect demand for bar & coins to move lower.

Chinese gold demand unlikely to be as strong as last year

In this monthly, our special focus is on Chinese gold demand. 2013 was a strong year for Chinese gold demand. In our base scenario, we don’t expect a repetition of last year though. An overall improvement in investor sentiment, confidence in the Chinese policymakers’ ability to manage the transition of their economy and less uncertainty about the yuan will hurt gold investment demand. Demand for jewellery will likely increase in line with the ongoing strong growth of the ranks and wealth of the middle class. We expect Chinese car sales to rise slightly.

What if…

Given that financial reforms and high leverage have raised concerns about a hard landing in China, we have looked in to the impact on precious metals, even though we see this is as a low probability scenario. We think such a scenario would have a mixed impact on gold prices as different drivers balance each other out, while such event will be negative for palladium (lower autocatalyst demand) and platinum (lower jewellery demand).

PM Monthly

 

140303 – Precious Metals monthly