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Gold Prices Likely To Start 2015 Weak, But Rise Into Year End

By Kitco News
Friday December 12, 2014 10:26 AM

(Kitco News) - Gold prices could be under some pressure in the first half of 2015 as the market anticipates the Federal Reserve raising interest rates, but once the Fed moves, the yellow metal may be able to end the year on firmer footing.

Market watchers said once the Fed starts the cycle of interest rate increases, the market can focus on how high the rates may rise, which will be less of a weight since the expectation is that rates won’t rise very much. Higher interest rates are bearish for gold because they give investors a reason to move money into investment vehicles that produce a yield. Gold has no yield.

The Fed official exited its asset-purchase program in October and is on the path of monetary-policy normalization after using extraordinary measures to support the U.S. economy in the aftermath of the 2007-08 credit crisis. Based on slowly improving economic data, such as an unemployment rate of under 6% and third-quarter gross domestic product of 3.9%, economists expect the Fed will be in a position to start to raise rates by the second half of 2015.

“Looming Federal Reserve interest rate increases in the second half of 2015 and the stronger U.S. dollar will keep pressure on gold prices through the year. The gold market could see rallies if demand improves for physical gold, but weaker growth in much of the world will temper such prospects,” said Rob Haworth, senior investment strategist, U.S. Bank Wealth Management.

Erica Rannestad, senior analyst, precious metals demand, Thomson Reuters GFMS, agreed that gold prices will likely be lower in the first half of the year because of the Fed’s expected action, which she called “the top driver” for gold-price direction.

She said gold prices will likely consolidate next year, and lists and a 2015 average price $1,175, with prices trending higher in the second half of the year.

That’s only slightly lower than where Commerzbank analysts put their 2015 gold average price: $1,200. They, too, cite a weaker first half of 2015 for gold. Citi Research estimates the average price for gold at $1,220 in 2015. TD Securities lists its average 2015 gold price at $1,225. Natixis forecast gold at $1,140.

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It might be a rough year for commodities in general, Haworth said.

“We believe 2015 is a struggle for the broad commodity complex. We would generally favor industrial metals within the complex due to relatively tighter supplies. Gold performance will likely be in the middle of the pack, with agricultural and energy commodities experiencing more performance extremes to the impacts of weather, conflict and changing supply and demand,” he said.

TD Securities said gold prices in the first half of 2015 could also find pressure from the slow growth in China and Europe, along with the sharp drop in crude oil prices, which is disinflationary.

“Less inflation tends to lift real rates and reduce demand from investors, who buy gold and silver as a hedge. Lack of investable petrodollars, after the recent oil price collapse, also negatively hit demand for real assets and may lift Treasury yields just as the Fed will no longer be there to pick
up the slack now that it ended its QE-inspired asset purchase program,” they said.

Physical Demand

2014 was marked by sluggish physical demand, particularly out of Asia. India’s demand was softer in the first half of the year because of onerous import restrictions and Chinese demand was lower than the previous year in part because of 2013’s price drop stoked a voracious appetite for the metal. That demand remained satiated for much of this year, Rannestad said.

Additionally, much of 2013’s heavy demand was due in part to financing deals that didn’t occur in 2014, and a slower economy also pinched disposable income.

For 2015, Rannestad said GFMS expects a pickup in Indian demand now that the country removed its complicated 80-20 rule, where 20% of the country’s gold imports had to be sold to jewelers for re-export. However, she said, it won’t necessarily mean a big jump in imports.

“We already saw imports in July normalize,” she said.

Analysts at Citi Research called the lifting of the rule “clearly supportive from a physical point of view.”

GFMS expects the local premiums will come down from the high levels seen when gold imports were restricting supplies. Those are expected to normalize between $4 and $10 an ounce, she said.

Chinese demand will remain weak compared to 2013 levels, Rannestad said, as that country still feels the effect of buying so much during that year. Further, the economy remains sluggish, which may curb demand.

She said the $1,200 level still entices physical demand, but that might not last early into next year. As buyers get more accustomed to values at $1,200, they may want to see prices fall further to feel as if they are getting gold at a bargain, she said.

Analysts at Citi suggested firmer demand out of China for 2015. They said the People’s Bank of China is starting to expand the list of eligible miners, banks and other Shanghai Gold Exchange members that can import gold in order to spur domestic investment.

“In addition, SGE turnover has picked up steam, while gold imports have been strong in September and October, suggesting that the Chinese market is starting to also provide a strong floor for gold against the macro backdrop of U.S. dollar strength.

“While these headlines are not necessarily game changers they can further lend support for gold markets which have fallen (about) $700 (a troy ounce) since peaking during the 2011-12 cyclical boom and has neared a floor in our view,” they said.

By Debbie Carlson, newsfeedback@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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