Like most markets, gold takes time to recover from periods of turbulence and in early 2015 it is continuing the stabilisation of 2014 following the hurricane that swept through it in the previous year. Demand contracted sharply in 2014 as some key regions, notably China, suffered from over-purchasing in 2013, while lack of confidence in any near-term price recovery deterred investment purchases elsewhere. There are signs that confidence is starting to return, however, as the physical market adjusts and takes comfort from the price stabilisation since November 2014.
Thomson Reuters released “Gold 2015”, the 49th in the series of annual Surveys, looking at the shifts and developments in the global gold markets, their fundamentals and their drivers, over the year and setting the scene for future.
In the western markets in particular, dollar strength and the focus on FOMC policy has remained to the fore. While US monetary policy will remain a central focus over the course of 2015, investors are already discounting a return to a rising interest rate cycle (albeit gradual) and it is arguable that loose-handed holders are out of the market. This does not automatically signal higher prices however, as these require fresh investment activity; indeed there is still the possibility of short-side sales in response to any unsettling news or economic development. Once the new rate cycle is in place (or signalled) asset reallocation is likely to commence and we expect gold to benefit accordingly.
The dollar is likely to retain currency supremacy, given monetary policy elsewhere in the world, and non-dollar-denominated gold prices are believed to have bottomed. In dollar terms, however, the GFMS team at Thomson Reuters is looking for further slippage towards $1,100/ounce during 2015, with an annual average of $1,170/ounce in 2015, with prices rising towards year-end; this should lead to an average of $1,250/ounce in 2016 as buying picks up in Asian markets and institutional investment in these markets offsets the recent decline in Over-the-Counter demand in the West.
Official sector gold transactions in 2014 amounted to an estimated net purchase of 466 tonnes, up 14% from 2013 and the second highest level since the end of the gold standard. Heightened political tensions in 2014 saw Russian central bank reported gold purchases reach record levels at 173 tonnes, while several CIS countries increased their gold holdings. Sales remained muted. The sector is expected to remain a source of demand for gold over the medium term.
The renewed eastward shift in physical gold demand (following the westward lurch following the start of the financial crisis) stalled last year, but is expected to resume as the markets continue to stabilise. This will, in GFMS’ view, give the gold market fresh stability in the near to medium term. The appetite for gold in the East was well-illustrated in 2013 and, as stocks are worked off and confidence returns, we expect the Asian markets to reassert their power in terms of price support.