After the sharp sell-off late last week, gold faces another moment of truth with this week’s two-day meeting of the US Federal Reserve which is expected to start cutting the size of the $US85 billion a month in spending that has supported financial markets and economies around the world, especially America’s.
Gold lost 5.6% last week, most of it on Thursday and Friday as investors prepared for the Fed move, which will be revealed early Thursday morning, our time, with a statement and then a media conference appearance by chairman Ben Bernanke.
Comex futures prices in New York lost 1.7% on Friday after a 2.4% drop on Thursday – a loss of $US55 an ounce in two days.
The metal ended at $US1,327.60 in after hours trading, adding to its official closing level of $US1,308.60.
And the weakness was not just confined to gold.
Comex December silver – which fell 4.4% on Thursday – added to its drop on Friday, losing 1.9% to $US21.72 an ounce.
That took the metal’s fall for the week to 9.1%, again emphasising its high volatility compared with gold.
Fear about the impact of the Fed move was the driver, and there were plenty of analysts on hand to forecast further weakness, as we wrote last week.
In fact most analysts surveyed by the likes of Reuters, Bloomberg and Kitco saw gold falling under $US1,300 an ounce this week in reaction to the Fed’s expected move.
The question then is, will it remain there as the market settles down or will it find its way higher thanks to strong demand for the metal from China?
Some new forecasts are gloomy, others mixed.
For example, Reuters GFMS, one of the most respects of all forecasters, said late last week in its second gold update for the year that gold could run up to $US1,500 an ounce early next year, but then fade back to around $US1,350 an ounce because of flagging demand.
But before then it will run into some heavy weather in the wake of the Fed’s move.
Reuters GFMS pointed out that the gold price has been supported in recent months by strong buying from private Chinese investors, who have filled the breach by the collapse in demand from India where the government and central bank has cracked down on gold imports and sales in an effort to stabilise the rupee and the banking system.
As evidence of the surge in demand from China, Reuters GFMS reported that the amount of gold being made into jewellery rose 41%, or nearly 100 tonnes, to a record of 345 tonnes in China in the first half of the year. But that buying splurge won’t last.
Reuters GFMS also said it sees total gold demand sliding to "2,237 metric tons this half from 2,309 tons a year earlier and 2,533 tons in the first six months of 2013. Jewellery demand that reached a six-year high in the first half on record buying in China, will ease in the six months through December."
And HSBC analysts said in a note late last week that gold’ s bull market, which started in 2001, has ended.
“A shift in risk sentiment fueled by expectations that the Federal Reserve will taper quantitative easing triggered sustained gold exchange-traded-fund liquidation and a steep reduction in long positions on the Comex, which severely undermined prices,” HSBC analysts said. But the firm did raise its price forecasts for 2013 to $US1,446 an ounce from $US1,396. It’s 2014 price forecast is $US1,435.
HSBC said gold’s near-term direction will be “highly data dependent and is likely to be volatile.” But “robust emerging-market demand for physical gold in response to lower prices has supported prices and this demand will drive future prices”.
But Goldman Sachs analysts last week warned the price of the metal could drop under $US1,000 an ounce in 2014. The firm’s 12 month target is $US1,175 an ounce.
Reuters GFMS seemingly agree, forecasting that gold will suffer its first annual price drop in 13 years in 2013 as some investors lose faith in the metal and the impact of the Fed’s expected move to begin curbing stimulus spending.
“Although an improving outlook for the U.S. economy has raised the probability that the Fed will start to scale back its stimuli after its September meeting, the majority of the negative factors have already been priced in,” GFMS said in its latest update on the metal’s outlook.
“Demand in India is forecast to be some way short of the elevated level in the second quarter. Turning to China, the prospect for local demand is more promising, but growth is expected to cool down.”
On the mining side, Reuters GFMS notes that the slide in prices hasn’t impacted output so far. In fact gold production was up 3% in the six months to June, "with a broad geographic base of increases, buoyed by mining projects ramping up production".
Growth was especially pronounced in China, the Dominican Republic, Canada and Russia. With the trend in costs remaining upwards, rising 7% year-on-year, the slide in gold price in the second quarter of the year led to further margin compression.
"To date we have only seen a modest number of producers elect to cease operations and with the recent price recovery we expect this to remain the case in the short to medium term, limited to smaller, cash-strapped producers at the top end of the cost curve,” the report said.
