2015 Likely to Mark the End of the Bear Cycle for Gold
Metal Focus The Gold Focus report argues that gold will continue to face challenges in the near-term, in particular the global macroeconomic backdrop remaining unfriendly towards the metal. The biggest headwind continues to be expectations of US interest rate increases later this year, as other developed economies’ ultra-loose monetary policies (notably the Eurozone’s) remain in place, this helping to drive up the dollar against other currencies. Low inflation, weak commodity prices and strong equities are other factors that should keep gold under pressure.
All this points to further price weakness in the coming months and a low of below $1,100. However, there are good arguments to suggest that 2015 may well see the end of the gold bear market. While Western investor interest in gold remains low, selling pressure is likely to ease further from the already much-reduced level of liquidations seen in 2014. Meanwhile, Asian investment demand for physical gold is expected to recover from last year’s slump. Taken together, this points to stable or even improved investment demand for gold this year compared to 2014.
Other supply/demand factors should also at least mitigate the pressure on the gold price. Albeit marginal, the decline we forecast in mine production this year does suggest that the tremendous growth in output seen over the past two decades has probably come to an end. Meanwhile, producer hedging should remain slight and recycling is expected to remain flat, at levels far lower than those seen a few years ago. Moving to demand, jewlery consumption is forecast to increase, fuelled by growth in Asian markets. Official sector activity will also lend support to gold, as net purchases are expected to remain at near record levels.
Taking all this into account, we expect price downside to be limited. Metals Focus forecasts see a low for the year at $1,080 and an annual average of $1,190, marking a 6% decline compared to last year. In other currencies, by contrast, prices may well increase over the course of the year, just as they did in 2014, for example in the case of euro gold.
Finally, we believe that the actual start of US interest rate increases will, paradoxically, temper the pressure that their expectations have been placing on gold. This is premised on the assumption that increases will be slow and modest, leaving real short-term rates in negative territory for some time to come. The US economy remains highly dependent on private consumption, while household debt levels in the country are still very high, at least in absolute terms. As such, a dramatic increase in the debt-service ratio could jeopardize the country’s recovery. We therefore expect the Fed will take a measured approach in moving back towards a more normalized policy, particularly given limited inflationary pressures.
To conclude, while we remain cautious towards the prospects of the dollar gold price this year, we believe 2015 is likely to mark the end of the bear market. The last few months of the year may see a modest recovery, with more meaningful gains likely in 2016. From this point onwards, there are several factors that may provide the spark for a renewed gold bull market. These include gold- positive developments in foreign exchange, debt, inflation, commodity and equity markets.