FX BAZOOKA: gold 2014 outlook
FX BAZOOKA analyst Kira Iukhtenko
Gold prices drop in the year 2013 caught many investors by surprise. The yellow metal hit a historical high of $1920 per ounce in September 2011 and there was a wide-spread expectation for the price to continue the rally after some correction. However, bullion has depreciated by 26% since the beginning of the year and by 33% from the 2011 peaks. Gold has been trading slightly above the $1200 mark since summer 2013.
Global economy has substantially recovered since 2011, giving a boost to risk appetite. Safe, but boring gold has become less attractive for investments. This kind of logic has pressured XAU in 2013 and is expected to stand in the year 2014, if nothing catastrophic happens to the market sentiment.
Tapering - bearish for gold
The Fed has unexpectedly (or not?) announced the $10 billion QE3 tapering in December. Why haven’t we seen any immediate market reaction on the announcement? The answer is very simple; tapering is not really equal to tightening: monetary stimulus is still in place and is still huge.
However, the US monetary policy change will definitely impact the gold prices in 2014. Everyone understands that the era of loose monetary policy and cheap US dollar comes to an end. Real interest rates are gradually rising – the US 10-year Treasury yield has already recovered substantially. What’s more, when the bond-buying program is over, markets will switch to the expectations of a rate hike. Gold will become less and less attractive for investments as it will bring lower yields than the financial assets.
Demand for gold is traditionally high in times of a high inflation. Investors turn to the yellow metal as a store of value in an attempt to mitigate the inflationary risks.
This year we’ve seen a different situation: the major central banks have faced deflationary pressures. We are living in a time of subdued global inflation – there are no visible reasons for a significant money supply increase. Liquidity is not excessive even despite the central banks’ easing: the “newly-printed” money doesn’t reach the real economy, staying in the banking sector. Gold price is unlikely to increase in a period of a low inflation.
According to the World Gold Council report, Q3 physical demand for gold dropped by 26% year-on-year. In 2013 investment demand for gold contracted significantly, while demand for jewellery stagnated. Improvement of the global economy is generally good for metals, but the percentage of gold usage for industrial purposes is relatively small (see the diagram above). Central banks are still buying gold with diversification purposes, but this demand also doesn’t offset the slowdown in other areas.
All in all, the analysis doesn’t unveil any implications for gold appreciation in 2014.
At the end of the year 2013 gold is trading a little bit above the June 3-year low of $1180.0. The wide bullish monthly Ichimoku cloud has narrowed and is ready to turn negative - this is a strong bearish signal.
Bullion price remained quite resilient for now, but we expect it to break below the $1180.0 support in the coming weeks and to extend the decline. Our bearish target for Q1 2014 lies at $1080.0 (50% Fibo). All the rebounds will be seen as corrective as long as the $1300 resistance holds.
Chart. Weekly XAU/USD