At the end of March, Thomson Reuters GFMS released its Gold Survey 2016, looking at the developments in the global gold market and the future of gold prices. What are the main conclusions of the report?

Summary

Thomson Reuters is one of the best sources of information for businesses and professionals, while its GFMS team is the world’s leading consultant in precious metals. The annual GFMS Gold Survey is one of the most awaited and respected reports about the gold market, which offers comprehensive analysis of the gold demand and supply, analyzed by both sector and geography. Since we have previously summarized last year’s developments in the gold market, we are going to focus on the price outlook for 2016.

In brief, total physical demand slipped by 2 percent in 2015, largely on the back of lower jewelry fabrication, although this was partially offset by demand for coins and a pick-up in central bank purchases (net official sector buying rose by 4 percent last year, the second highest annual total since the end of the gold standard). Gold used in industrial fabrication saw a significant contraction in 2015, while total identifiable investment, which includes physical bar investment, all coins and ETF inventory build, increased by a modest 5 percent in 2015, primarily due to a slower pace of ETF selling. Total gold supply shrank by 2 percent in 2015 (scrap supply was slightly up, while mine production growth came to a halt in the latter half of the year). In sum, “after a promising start to 2015, the gold price in dollar terms continued trending lower for most of the year. Investor sentiment once again revolved around U.S. monetary policy, with prospects of an interest rate rise for the first time in nearly a decade and a stronger dollar putting pressure on the yellow metal and the broader commodities basket”.

Price Outlook

Let’s move to the most important part of the GFMS Gold Survey, i.e. the price outlook. The GFMS team point out that gold recorded an impressive start to 2016 and was the best-performing asset in beginning to the year. According to the Thomson Reuters, such an excellent performance has been largely attributed to a reduction in risk appetite among investors and fresh interest in safe-haven assets on the back of growing concerns about the global economy (including renewed fears over a hard landing in China, an escalation of geopolitical tensions in the Middle East, further declines in oil prices and turmoil across global stock markets). The heightened global market uncertainty along with the lack of confidence in the central banks (the Fed put its rates normalization on hold, while other world’s major central banks announced fresh stimulus measures, including NIRP), prompted investors to seek shelter in safe-haven gold.

That said, the GFMS analysts believe that “the recent price rally will prove to be short-lived and once current market turbulence starts to ease we are likely to see the price retreat again, particularly as physical demand in key Asian markets is already weak”. Moreover, the Fed remains determined to continue tightening, therefore “the strengthening dollar and a return of risk appetite will put renewed pressure on gold’s safe haven appeal and prices”. Hence, the price of gold is likely to drop below the $1,200 in the coming months.

Conclusions

The bottom line is that although the Thomson Reuters’ forecast remains bearish over the shorter term, it implies that the lows of this price cycle have already been seen at $1,050. The GFMS team believes that gold will find support due to the improving market fundamentals – the upcoming low is expected to be $1,150 and occur somewhere around the third quarter of this year. We agree with Thomson Reuters that “the gold market and future price moves will remain highly reliant on sentiment-driven factors”, in particular the Fed’s monetary policy and the changes in risk appetite among investors. Given the above-mentioned corrective character of the recent rally, a decline in the gold market would not surprise us. The Fed’s projections converged partially to market expectations of further interest rate hikes in 2016, so there is less potential for gold to benefit from “pricing out the U.S. rate increase”. However, investors should be aware the GFMS, just like the WGC, pays too much attention to irrelevant factors, such as weak physical demand in Asian markets, and its price outlook is based on the assumptions that the current market turbulence will ease and we will see a firm economic growth in the U.S. But if the heightened global market uncertainty remains (for example due to weak U.S. economic data) the price of gold could perform better than predicted by Thomson Reuters, especially in the final part of the year.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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