While gold prices may not fall back to their end-2015 levels, there are few compelling reasons for a fresh acceleration in the near term. After a strong performance in the first half of this year, gold has been moving within a range of USD1300- USD1375 per troy ounce. While physical supply and demand favour a gradual rise in gold prices over time, some of the main drivers of investment demand (financial stress, inflation, real interest rates, the USD) do not suggest significant upside potential from current price levels, especially given our scenario regarding Fed tightening.Looking at some of these factors singly, even with US elections looming in November, the odds for the onset of a financial stress that leads to a sustained rise in gold seem fairly low for the moment. And demand for gold as an inflationary hedge remains muted given the current low levels of global inflation. Also, while the lack of inflation should keep real interest rates low, the scope for further declines in US real rates seems limited and therefore does not support a significant increase in gold demand. And currency trends, including our expectation that the long-term uptrend in the US dollar broad index will continue, are likely to remain negative for gold.
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Luc Luyet considers the following as important: Gold, gold demand, gold prices, Macroview
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While gold prices may not fall back to their end-2015 levels, there are few compelling reasons for a fresh acceleration in the near term.
After a strong performance in the first half of this year, gold has been moving within a range of USD1300- USD1375 per troy ounce. While physical supply and demand favour a gradual rise in gold prices over time, some of the main drivers of investment demand (financial stress, inflation, real interest rates, the USD) do not suggest significant upside potential from current price levels, especially given our scenario regarding Fed tightening.
Looking at some of these factors singly, even with US elections looming in November, the odds for the onset of a financial stress that leads to a sustained rise in gold seem fairly low for the moment. And demand for gold as an inflationary hedge remains muted given the current low levels of global inflation. Also, while the lack of inflation should keep real interest rates low, the scope for further declines in US real rates seems limited and therefore does not support a significant increase in gold demand. And currency trends, including our expectation that the long-term uptrend in the US dollar broad index will continue, are likely to remain negative for gold. Finally, the rise in gold prices since the start of the year is acting as a headwind for physical demand, leading to a 33% decline in jewellery demand in the second quarter of 2016 compared to Q4 2015.
Consequently, although bouts of higher volatility (linked to the US elections, for example) could push up safe-haven demand for gold, we do not see compelling reasons for a rise in the gold price beyond USD1430 per troy ounce in the next 12 months. We see a higher probability that the current price range will break to the downside–especially given the record high levels of non-commercial net long gold positions in the futures market.
At the same time, we remain convinced that gold reached a significant low point on 3 December 2015, when prices sank to USD1046 per troy ounce. Furthermore, with the many potential pitfalls that lie ahead in a slow-growth world and with the risks of a policy mistake by a major central bank rising, investment demand should remain strong. Consequently, a move below USD1200 per troy ounce seems unlikely in the next 12 months.