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Second Quarter Will Not Be A Great Time For Gold Prices – Analysts

By Neils Christensen of Kitco News
Sunday April 6, 2014 7:41 PM

(Kitco News) - Commodity analysts are expecting gold to remain weak in the next three months as seasonal factors, an improving U.S. economy and lack of bullish momentum drag prices down.

Ole Hansen, head of commodity strategy at Saxo Bank, pointed out that the second quarter is usually a quiet time for gold, but this year traders could be more sensitive to increased weakness in the next three months, especially after a strong first quarter.

After a disastrous 2013, the gold market started the year off on a relatively strong note. At one point during the first quarter, gold futures showed gains of more than 14%, as prices started the year at $1,204.50 an ounce and reached a seven-month high at $1,379 an ounce; those gains were shorted to just over 6%  as the first quarter ended at $1,279.60.

Hansen added that last year’s selloff during the first part of the second quarter will also weigh on investor sentiment.

In less than two weeks, there will be an unusual anniversary for the gold market. On April 15, 2013, prices of the yellow metal saw the biggest one-day decline, of more than 8.5%, in three decades; the price fell from an open of $1,487.40 an ounce and ended the session at $1360.60.

 “If you look at the overall quarter, (the second quarter) is historically a low period for gold. Even when we were in the bull market, there were some monthly corrections in April, May and June,” he said. “We had a good move to the upside in March, but there is really not any major bullish news out there at the moment which I think will put a limit on the upside.”

Comex gold for June delivery settled, after the pit session, Friday at $1303.50 an ounce; analysts have pointed out that $1,300 is a key psychological area; however, Hansen said that unless prices can close above $1,320, he would expect them to continue to move lower in the next three months.

Jessica Fung, commodity analyst at BMO Capital Markets, said although the seasonal pattern does point to lower gold prices during the next three months, it won’t be a straight-forward trend. Although she is expecting prices to continue to drop, she also said she is not expecting to see a dramatic selloff.

She added that the factors that led to last year’s sharp selloff -- fears that Cyprus would have to sell its gold to support its faltering economy, increased expectations of the Federal Reserve hiking rates, a shift in sentiment from Goldman Sachs, and the introduction of import restrictions in India -- are no longer relevant.

However, there is still a lack of fundamentally bullish news that is needed to drive momentum higher.

“We still think gold prices could move lower in the next few months,” she said. “There is really no reason for upside support, but there is no real reason for prices to decline sharply either.”

Renewed Physical Demand

Although some analysts are expecting prices to decline over the next few months, they agree it will be important to watch the demand for physical metal, which over the last year has dominated markets as prices dropped.

According to reports, demand has dropped dramatically over the last few months as prices bounced off of last year’s lows.

Bernard Dahdah, precious metals analyst at Natixis, said that for physical demand to pick up significantly, gold will have to drop suddenly in a surprise move. He added investors will probably stay away if there is a gradual decline and wait for a signal that prices are near a bottom before jumping back into the market.

Dahdah added that the firm’s base case is for gold to continue a gradual decline on the back of better U.S. economic data, a stronger U.S. dollar and higher U.S. Treasury yields. Historical seasonal trends will not impact markets.

“The trend for gold is still down. An improving U.S. economy and tapering will strengthen the U.S. dollar, which reduces the need for safe-haven assets like gold,” he said.

Fung added that she also doesn’t see physical buyers coming into the market just yet as they will probably wait to see significantly lower prices.

One issue that might turn around gold’s seasonal trend is the potential for the Indian government to loosen some of its import restrictions on the yellow metal. Fung said speculation on a rise of imports into India will help the price in the short-term but won’t be sustainable.

“I don’t think we will see India lift its restrictions in the second quarter. I think it will happen later in the year,” she said. “I think they will want a couple more quarters behind them before they decide what they are going to do.”

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By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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