The environment surrounding gold in 2013 changed decidedly and the metal started the New Year under new conditions. Once the factors that have been influencing the metal for the past decade started to fade, rather fall-away, for the first time in twelve years gold finds itself in a downtrend.
First and foremost the start of the Tapering in January 2014 is the first step towards containment of the cheap-money policy. With it a strong driver for bull-trends in the past years is being withdrawn. The discussion about further reductions in these monetary measures is going to continue to be with us for a while. Even with the currently reduced bond-buying of 75 billion US-Dollar per month, the Quantitative Easing Programme in the USA continues to be enormous and the scope for reductions substantial. However with Janet Yellen at the head of the FED, decision-makers will continue to have to contend with another proponent of the QE measures.
During the course of the long-drawn and at times contradictory discussions about the timing of a Tapering, a larger part of the effect was already priced in by the market. Nevertheless economic data from the USA will continue to stay in the focus. A sustainably recovering US economy will benefit the US-Dollar – and this will add more pressure on gold. That not all problems are on their way to getting better, let alone solved, is reflected in the discussions about the US deficit. The budget problem and the related debt-ceiling, even with the consensus in the Congress, have not yet been lastingly solved. The US Senate is still to decide and could deflate the tentative euphoria.
In such an environment yield-driven investors may not change their critical view on gold. As such further Gold-ETF outflows are likely – though we expect these to be lower in volume than in the previous year. The need for gold as a “safe haven” is for some time now no longer prevailing: besides the positive signs of improvement in the US economy, the EU-crisis nations are also putting their saving-plans into action and the acute crisis-fear has somewhat abated. The apprehension about inflation as a consequence of excessive money supply has also proved to be untrue and has weakened as a driver for the metal. The prevailing risk-aversion of the past years has recently been replaced by rekindled interest in risk-richer assets classes like equities.
Should this euphoria get dampened – after all equities are at their highest levels – one or the other could find their way back to the precious metals. Investors in physical precious metals continue to remain as buyers and are making use of the opportunity presented by lower prices. This however has not been enough to compensate for the ETF outflows and provide enough support for a trend-change.
Last year China, with its record demand for gold, provided some balance to the ETF outflows. With this gold changed from weaker to stronger hands. As such physical demand from China in 2013 played a decisive role in supporting gold. We do not expect this to continue at similar, high levels, in 2014, even though China will continue to remain an important pillar of support for demand. We continue to see China as the number one consumer, ahead of India. Should import duties in India, against expectations, get reduced, one can expect some catching-up on demand.
Central banks were again net buyers, though not as strongly as previous year. We expect this trend to continue in 2014. The potential of a stronger US-Dollar and the global economy support this.
On the supply side we do not see any change in the mood in the recycling sector. Increased interest in selling scrap (old) gold will more likely be triggered again only by higher prices. Only then do we again see potential – after all, the sharp decline in scrap-gold volumes came simultaneously to the price-correction in April 2013 and not due to increased stocks. The reduced supply from recycling had an effect on physical availability of 999.9 gold and impacted premiums accordingly. Primary production is expected to grow slightly. Among others, high prices in the past years prompted investments into new explorations.
In view of the downward trend, already last year a few mines hedged – to a limited extent – their future production through forward sales. We do not expect a sustained effect from the development.
After gold repeatedly defended the 1,200 $/oz mark, for the moment it appears a floor has built around this level. However, for reasons mentioned earlier, we expect further temporary setbacks to 1,175 $/oz in the first half of this year. On the upside we see medium-term potential for price-rises. 1,390 $/oz is our expectation of the upper-limit for the first six months of 2014.