In the first half of 2014 gold traded in a relatively tight range, between 1,198 - 1,391 $/oz (Heraeus H1 prognosis 1,175 - 1,390 $/oz). It recorded a gain of 9% during these six months. This positive development has, however, not been enough to draw it out of its continual downtrend. The previous drivers are pointing too strongly towards a retreat.
Since the start of the year the US central bank has put into motion its tapering policy and has reduced its bond-buying by $ 10 billion a month. As such, and expected, the FED is on its way to ending its Quantitative Easing Programme by the end of this year. However, the market reaction to this, often discussed, tapering, has been restrained – the end of bond-buying is already priced in. Thus, while the era of cheap-money in the USD zone is coming to an end, the combination of a generally dovish tone from Janet Yellen and the assertion, that interest rates will not be raised for the time being have tended to benefit gold. The economic development in the USA will remain in focus in the coming months to see whether the current interest-rate policy of the FED will stay or change. After the weather-battered difficult economic start to the year, the market expects the second half to record a better GDP, which then will strengthen the USD to the disadvantage of gold.
Such an environment should further strengthen the already critical view of investors towards gold. After a slight increase in ETF stocks earlier on, as expected, the rest of the first half of 2014 saw net outflows. However, the speed and volume of this trend was much lower when compared to the previous year. The need for a “safe haven” has for some time now not been predominant anymore and the all-time highs in the equity markets reaffirm the investor’s return to preferring riskier asset classes. Geopolitical tensions in the Crimea or the Iraqi crisis existing at the time of writing this report have not led to the same “flight to safety” as happened during the banking and Euro-crises. The influence of such tensions compared to financial and economic dangers is considerably less and helps gold only in the short to medium term. After the USA, the outlook for Europe has also improved, as such the need for physical gold as a safe investment is today somewhat restrained.
As such, in the coming months we expect a further reduction in ETF stocks. However, the supply side will not be affected as much as in the previous year. This fits in with the present demand picture from Asia, especially China, where since the beginning of the year (and more so after the Chinese New Year festival), demand has been cautious. Premiums have accordingly reduced in H1. After ETF outflows in 2013 were soaked up by the extraordinary demand, vaults are now full and demand is, as expected, lower. Nevertheless, we still see China as the number one consumer world-wide and ahead of India this year too. After the recent elections in India the chances of a gradual easing of import restrictions on gold are generally better, provided that oil’s price development due to the Iraqi tensions does not continue. We will have to wait and see how much of what was promised was election propaganda and how much genuine intent. Ultimately the new government will also have to take measures to balance the trade deficit, thus we expect only a mild easing. Despite the forthcoming wedding season, official demand will therefore be kept “artificially” low. Nevertheless, we are of the opinion that due to such seasonal events, demand in the second half of the year will strengthen. The overall movement in the centre of gravity of demand from West to East will continue.
The first quarter showed that central banks, against expectations, are tending to be stronger net buyers than in 2013. We will have to wait and see if this tendency will continue for the rest of the year but our expectation is that it will.
In terms of secondary supplies, at prices above 1,300 $/oz we have repeatedly seen selling interest in gold. However, generally seen, the supply side in the second half of the year too will get little support from scrap gold recycling.
Fundamentally gold has stabilised in the first half year. In the second half there is potential for higher volatility within the range. The various factors influencing price appear to be relatively well balanced; as such we do not foresee any extreme break-outs. Under these circumstances we will stay with our H1 prognosis and expect till the end of the year a low of 1,175 $/oz, average of 1,290 $/oz with an upward potential till 1,390 $/oz.