Gold market returning to stability: Survey

After a turbulent 2014 that saw demand contract sharply, confidence is beginning to return to the gold market in 2015, says a new report.

The Thomson Reuters GFMS Gold Survey 2015 estimates that while local prices of the yellow metal have already bottomed out, in dollar terms, gold will experience a further slippage towards $1,100/ounce during 2015, before rising towards year-end. The survey expects gold to average at $1,170/ounce this year and an average of $1,250/ounce in 2016 as buying picks up in Asian markets and institutional investment offsets the recent decline in over-the-counter demand in the West.

The report goes on to add that while US monetary policy will remain a central focus over the course of 2015, investors have already begun discounting a higher interest rate cycle, which may not automatically signal higher prices, although once in place, could lead to asset reallocation and benefit gold accordingly.

“There is still the possibility of short-side sales in response to any unsettling news or economic development”, the survey states.

Gold prices are generally seen to have an inverse correlation to rising interest rates.

DEMAND DRIVERS

According to Thomson Reuters, official sector gold transactions in 2014 were up 14 percent from 2013 reaching the second highest level since the end of the gold standard, with record purchases from Russia and CIS countries. This sector is expected to remain a source of demand for gold over the medium term along with the structural shift in the market in favor of physical gold.

Jewelry demand also continues to remain robust in China and India, between them accounting for 54 percent of the world’s jewelry, bar and medal demand in 2014. The latter, despite import restrictions, has continued to remain a big consumer of the yellow metal. Investment demand for coins, bars etc. that slumped by 40 percent last year, and ETF holdings which also continued to erode, are expected to make a comeback.

The gold-mining sector, however, remains in a precarious condition and output is expected to be flat in 2015 before starting a palpable decline. Corporate activity in the gold-mining industry has also continued to decline in 2014, with aggregated deals amounting to just $7.3 billion, approximately nine percent lower than in 2013.

Gold was up nearly one percent on Friday, closing at $1,204.60/ounce on expectations that data to be released this week could show that the US recovery is hitting a speed breaker.