- The battle between forces resulted in erratic behaviour of gold prices
- …but the outlook for gold for the coming two years remains negative
- …while we only expect weakness in other precious metals for the coming 6 months
The battle between forces
At the start of this week, investor sentiment deteriorated. This was reflected by a sharp spike in equity volatility or the VIX index, to 24. Meanwhile, investors not only started to avoid currencies of oil exporters but also currencies of countries with weak fundamentals. There were some concerns that the abyss-like price action in the Russian ruble would spill over to the Turkish lira where the current account deficit remains large and political developments are uncertain. As a result, gold prices received some support. However, lower oil prices (i.e. a lower need for inflation hedge), a recovery of the US dollar and expectations that the US Federal Reserve will start hiking interest rates at the middle of 2015, counterbalanced the safe-have support. Therefore, gold prices stabilised between 1,185 and 1,220 USD per ounce. This behaviour suggests that there are good buyers below 1,190 USD per ounce at the moment. However, the momentum in other precious metals has been far more negative.
Our outlook for 2015 and 2016
It is likely that jewellery demand for precious metals will increase in the coming years. For starters, we expect Indian demand to recover and Chinese demand to remain in place. But Chinese demand will be below the 2013 peak level, because of the slowdown in the Chinese economy and the anti-corruption measures. So, higher demand from India and China is expected to result in an increase in precious metals jewellery demand.
In addition, the strengthening of the global economy should go hand in hand with an increase in demand for precious metals for industrial uses. For example, the recovery of the eurozone economy, strong US demand and more Chinese demand for cars should also result in an increase in demand for precious metals. Therefore, we have pencilled in increases in both industrial and car sales demand for the coming years.
However, precious metals have a strong tendency to weaken if the US dollar appreciates and US interest rates move higher. Therefore, it is increasingly likely that an upward adjustment in US rate hike expectations will push the US dollar higher and precious metals lower in the coming quarters. It is likely that investors will continue to reduce exposure in the wake of a higher US dollar and rising US interest rates, if investor sentiment remains positive. The search for higher yielding assets with a less uncertain price outlook will be the main reason for investors to sell precious metal positions. Positions in Exchange Traded Funds are still very substantial. Therefore, a liquidation of part of these positions will heavily weigh on precious metal prices. In the coming months, investor position liquidation will probably overshadow the rise in jewellery, industrial and car sales demand. Therefore, we have reflected this in our forecasts. In the case of gold, investor liquidation in 2015 and 2016 will overshadow the increases in jewellery demand in our view.