Precious Metals Weekly – Transitory forces

by: Georgette Boele

150121-Precious-Metals-weekly.pdf ()
  • Gold prices have risen 9% year-to-date…
  • …mainly because of safe haven demand and expectations of fewer Fed rate hikes
  • But we expect these forces to be transitory…
  • …with expectations of Fed rate hikes and a higher dollar to push gold lower again

Start of a new bull run?

Gold and silver have continued to rally strongly. Since the start of the year they are up by 9 and 15% respectively. The decision by the Swiss National Bank to discontinue the floor in EUR/CHF pushed gold prices higher. Now traditional gold-bulls are expecting/hoping for a new upward trend in gold prices. What are the drivers behind the rise and will it continue?

Investor sentiment is important…

Since the end of last year, investor sentiment has deteriorated and this has resulted in safe-haven demand for gold. This has been reflected by a rise in equity volatility. Both gold prices and equity volatility (VIX) have moved higher in tandem (see graph below).

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  …but don’t underestimate Fed rate hike expectations

Investor sentiment has played a crucial role, but don’t underestimate the impact of Fed rate hike expectations for 2015. Initially, the drop in oil prices hurt gold prices because of lower inflation expectations. However, from the moment that the market scaled back Fed rate hikes for 2015, the outlook for gold prices improved (see graph on the right). Lower than expected US average earnings and consumer price inflation have only accelerated this adjustment. As a result, gold prices are now above USD 1,300 per ounce.

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These forces to be transitory

Despite the positive trend so far this year, we remain negative on the outlook for gold prices for this year and next year. In the first half of 2015, we still expect precious metal prices to fall reflecting US dollar strength and upward adjustments in US rate hike expectations. Also constructive investor sentiment should reduce safe haven demand for gold. While we expect gold prices to remain under pressure up to the end of 2016, for the other precious metals, positive global growth outlook will dominate and support prices.

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