Treasure Chest: Gold Set To Break Down?

By Greg Peel

As the following chart confirms, a period of volatility for the US dollar gold price earlier in the year has given way to a tight trading range beginning late March which has yet to be breached, despite strong moves in the US dollar and US bond yields.
 

While periods of decoupling often do occur, the primary driver of the US dollar gold price is the value of the US dollar itself. On expectations of a strengthening US economy in 2015, and thus a Fed rate rise before too long, the US dollar index rallied early in the year. But when a snowbound March quarter suggested weaker than expected economic growth, and thus a delay in any move from the Fed, the dollar fell back again.

This month, weakness in the euro in particular has driven the US dollar back up again as has improving US economic data after that weak first quarter. An overbought US bond market has shown its first signs of selling off, and yields have also risen sharply. Yet the gold price has gone nowhere.

Outside of the mathematical connection between the US dollar gold price and the US dollar, actual physical demand for the metal is an important driver, and here, China and India are the world’s foremost consumers of gold for jewellery, bars and coins.

ANZ commodity analysts note the latest figures from the World Gold Council showed China’s retail demand for gold in the March quarter was 7% lower than a year before. China looks to have increased its onshore stock surplus to around 500t over the past twelve months, and thus with retail demand sagging, further stocking is unlikely unless the price were to fall. This may keep “visible” imports to only 850t this year compared to 1027t in 2014, ANZ suggests.

The other big retail consumer of gold is India, and here purchases of gold are highly concentrated in the two major holiday festivals of the year, for which gifts of gold are culturally the norm. The first of such festivals is now passed, and the next is not for a few months. Thus we are now in a seasonal black hole for Indian gold demand.

As the US dollar continues to appreciate, and physical demand from China and India remains absent, the gold price is likely to break down from its current tight range, ANZ believes. The analysts have a negative view on the metal, and suggest the US dollar gold price may yet have another shot at the US$1100/oz mark.
 

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