Gold rate may slip to $1,100 in ’15

GFMS, a consultancy and research agency focused on precious metals, expects gold prices to slip to $1,100 per ounce-levels in 2015, with an annual average of $1,170 per ounce.

The prices may bounce back by the end of the year and in 2016 the average price may reach $1,250. This, according to GFMS, is because the rise in physical buying and investment demand in Asian markets will offset the decline in the over-the-counter demand in the west.

The renewed eastward shift in demand for physical gold, that was stalled last year, 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, GMFS expects the Asian markets to reassert their power in terms of price support. The retail coin and bar market was the one that really suffered in 2014, slumping by 40 per cent year-on year, driven particularly by the Asian markets. GFMS expects the cramped investment demand of 2014 in the Asian markets to recover.

GFMS, however, does not expect much upside in 2015. The strength of the dollar and the focus on Federal Reserve’s policy has remained crucial in the gold market. 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 and lose-handed holders are out of the market.

This does not automatically signal higher gold prices as it requires fresh investment activity. But there is a possibility of short-selling in response to any unsettling news or economic development. Once the new rate cycle is in place, asset reallocation is likely to commence and we expect gold to benefit accordingly, finds the survey.

“Gold prices have already discounted for the US interest rate hike. The interest rate hike is now pushed to the last quarter of the fiscal against earlier assumption that it could happen in June. This has seen some upside in gold prices. But, gold need not sustain these upsides. Gold is near bottom levels, but some more correction is possible to $1,100 levels,” said Tapan Trivedi, senior analyst, Karvy Comtrade.

“Thirty per cent of the mining activity by large as well as medium miners will become difficult if prices come to $1,100-$1,050 per ounce levels. Once these miners stop production, there could be supply issue in the gold market. This could help prices move up by the year-end,” he added.

The GFMS survey too finds that in terms of both volumes and profitability, the mining industry remains in a precarious position. The growth in global gold production slowed in 2014 and 2015 too is expected to see output halt as capital investment in new project development remained constrained during 2014 and there were also cuts in greenfield exploration expenditure.

Gold price lies beneath the average all-in cost of production, and far below estimates of an incentive price required for the exploration and development. Global scrap supply declined by almost 13 per cent last year to an estimated 1,125 tonnes. The supply-demand situation points towards better performance of gold in 2016.