Analyse fra Commerzbank:
The gold price has fallen to a 5½-year low of less than USD 1,080 per troy ounce. In euros, gold fell to a 6½-month low of EUR 980 per troy ounce (chart 1). Unlike in 2010, the gold price did not benefit from the escalation of the Greek debt crisis and the temporary possibility of Greece exiting the euro zone. Price rises following the breakdown of negotiations with Greece on the release of bailout funds and the rejection of austerity measures in the subsequent Greek referendum were limited and proved to be extremely short-lived.
Greece’s temporary default to the IMF had no impact whatsoever on the gold price. The closure of Greek banks, the freezing of ECB emergency loans and restrictions on cash withdrawals in Greece had no effect on gold either. Gold even came under heavy pressure after agreement was reached in mid-July on the opening of negotiations for a third bailout package for Greece and the resulting decline in the likelihood of Grexit. Market participants clearly regard the current Greek crisis as less threatening than previous crises.
Contagion effects to other euro zone countries were largely absent, judging by the moderate widening of interest rate spreads between other peripheral countries and Germany. Equity markets fell significantly in the interim, but soon made up their losses and are now back where they were at the end of May. The gold price was also impacted by the steady appreciation of the US dollar due to the Fed’s looming rate hike, the prospect of a continuing ultra-loose monetary policy on the part of the ECB and the still low level of inflation. The drop in oil prices since the end of June undoubtedly reinforced this perception.
Nor has the slump in the Chinese equity market since mid-June led to higher gold prices. Since it has become much more difficult due to sell shares due to restrictions by the authorities, many Chinese investors have clearly been selling industrial and precious metals in order to hedge their equity portfolios.
TIn contrast to earlier crises, demand for gold has remained comparatively modest. Admittedly, coin traders reported stronger demand for gold coins in June. Britain’s Royal Mint reported above-average demand from Greece. Significantly more coins were also sold in Germany, Australia and the USA. Sales of US gold coins reached 76,000 ounces in June – their highest level since January – and have since exceeded this figure in July.
After the first three weeks of July, the United States Mint had already sold 126,500 ounces of gold coins, as much in a single month as at any time in the last two years. However, the quantity sold in June and July equates to only 6.3 tons of gold. This compares with significantly higher outflows from gold ETFs, whose stocks fell by just under 10 tons in June. The escalation of the Greek debt crisis in the second half of June did not lead to notable or indeed long-lasting ETF inflows.
Despite the looming possibility of Grexit, further outflows took place in early July which accelerated as the crisis abated. Since the beginning of July, the outflows amount to 39 tons. In mid-July, even the largest one-day outflow in more than two years was reported. Stocks of gold ETFs recorded by Bloomberg are now at their lowest level since early 2009 (chart 2). In particular, selling by speculative financial investors has been a major contributory factor in the weak price trend for gold. Net long positions of money managers, i.e. their bets on rising prices, have fallen almost continuously since mid-May, primarily due to a build-up of short positions. In mid-July, money managers even had net short positions for the first time since records began in June 2006 (chart 3).
The previously reported decline in net long positions since mid-May corresponds to the sale of the equivalent of nearly 250 tons of “paper gold”, equal to the average quarterly global demand for coins and bars since the beginning of 2014. This does not even take the latest price fall into account, therefore net short positions have probably risen still further in the interim. Until recently, events in Greece and China affected the gold price far less than the market’s waitand-see attitude regarding the timing of the first rate hike by the US Federal Reserve. As long as uncertainty persists in this regard, the gold price is unlikely to recover significantly.
At the moment, Fed Fund Futures fully discount a first 25 basis points rate hike by the Fed in December and a second one by mid-2016. However, our economists consider the September meeting to be a likelier date, with a second hike in December. We believe the gold market is currently pricing in a more aggressive monetary tightening cycle than the money market. We remain convinced that gold will regain strength once uncertainty over the start of the tightening cycle has dissipated with the first rate hike.
Such a price reaction was observed during the last tightening cycle by the Fed between 2004 and 2006. The gold price also rose during the first half 2014 after the start of “tapering”, i.e. the scaling back of bond purchases by the Fed, until the rate hike debate got underway. Physical demand for gold in the important Asian countries is likely to rise considerably in the second half of the year, boosted by lower prices. China’s equity boom inhibited Chinese demand for gold in the first half of 2015, with gold imports from Hong Kong in the first five months of the year 18% down on the prior-year period.
Recent negative experience of shares may well rekindle interest in gold among Chinese households. In India, gold demand is also likely to be higher during the autumn holiday and wedding season. A risk factor remains the weaker monsoon season caused by the El Niño weather phenomenon so far. If it results in a lower harvest, this would have a negative impact on the income of the rural population and its demand for gold. However, physical demand in Asia will not be enough on its own to drive up the gold price. This will require a higher investment demand. The central banks also remain on the buying side.
Just recently, the Chinese central bank reported that it had purchased over 600 tons of gold in the last six years. The market was actually disappointed by this figure – in view of annual mine production of more than 400 tons, a significantly higher purchase volume had been expected. However, it should be remembered that most of the gold purchases were probably made in the last two years. Net gold imports via Hong Kong and domestic mine production exceeded private consumer demand last year by 450 tons (chart 4). In the previous year, the discrepancy was 275 tons. This “oversupply” is presumably very close to the purchases by the Chinese central bank.
Russia’s central bank is also likely to remain a major buyer of gold. It bought more than 67 tons of gold in the first half of the year and a total of 560 tons in the previous five years. Following the recent price fall below the important support zone of USD 1,130-1,140 per troy, it is unrealistic to expect our previous year-end forecast of USD 1,250 per troy ounce to be realised. In the short term, a further decline towards USD 1,000 per troy ounce cannot be ruled out. Sentiment towards gold is already very negative, as reflected by public reporting and the record-high level of speculative short positions.
Such extremes of sentiment normally represent turning points for markets. Short covering – perhaps in the event of weaker US economic data or renewed uncertainty over Greece – could allow gold to recover significantly for a time. However, such upward movements are unlikely to be long-lasting. In euro terms, gold is now trading lower than in January, before ECB President Draghi announced the ECB’s decision to make substantial bond purchases (chart 5). Against this background, gold is too cheap. We therefore expect prices to rise above their current level in the medium to long term. If, as we expect, the Fed hikes interest rates more aggressively, this will exert pressure on equity markets, which have survived the debate over a looming rate hike with no ill effects and currently stand close to their historic highs. This in turn should benefit gold. We are lowering our year-end forecast to USD 1,150 per troy ounce. By the end of 2016 we expect gold at USD 1,300 per troy ounce (previously USD 1,350 per troy ounce).
