Gold To Climb By Year-End, But Expect Fierce Resistance - Capital Economics
(Kitco News) - The end of 2018 will see gold prices climb slightly higher, but several macroeconomic factors still weigh down on demand for the precious metal, according to a recent research report by Capital Economics.
Weaker economic growth in some of the largest consumer markets will lead to lower consumer demand, the report said. This, along with a stronger U.S. dollar, will continue to add downward pressure on gold prices.
“Traditionally, this source of demand tends to be relatively price-sensitive. Given the recent falls in the price of gold in U.S. dollar terms, one could assume that physical demand will bounce back. However, we don’t think that this will happen,” the report said.
Consumer demand is an important indicator to consider when assessing the medium-term outlook for gold prices, said analysts at Capital Economics, while short-term price fluctuations can be influenced by investor sentiment.
“Consumer demand for gold, which includes jewelry and bars and coins, accounts for over two-thirds of total gold consumption. India and China are by far the largest consumers, accounting for 40% of the total, followed by the U.S., Germany and Turkey,” the report said.
The report cites three main reasons for lackluster consumer demand in the medium term.
First, due to the U.S. dollar appreciating against major currencies, gold has risen in local-currency terms in some countries, and this has weighed down local consumer demand.
Second, economic growth in China and Turkey is expected to slow. The economic slowdown in two major consumer gold markets will have negative implications for gold demand.
Finally, in the world’s second most populous country, a below-average monsoon will weigh on India’ gold demand despite strong economic growth, the report said.
Because of these headwinds from consumer demand, Capital Economics sees risks to the short-term forecast for gold prices, which analysts expect to rise over the coming months due to strong investment demand for safe havens and inflation hedges.
“Overall, we doubt that consumer demand for gold will provide much support to prices in the remainder of the year. If anything, it might actually add to the downward pressure on prices,” the report said.