On July 28, the Thomson Reuters published the GFMS Gold Survey: Q2 2015 Update and Outlook. What can we learn from this publication?
The most important information is perhaps that physical gold demand declined 14 percent in the second quarter on an annual basis, to its weakest since 2009. All categories of physical demand fell, including even jewelry demand. This confirms the negative sentiment towards gold, since usually lower prices boost jewelry demand. Also institutional investors’ interest in gold has remained in the doldrums in the second quarter, as ETF gold holdings declined by 1 ton.
China’s demand has been weak so far in 2015 (retail investment fell by 26 percent year-on-year, while China’s gold jewelry fabrication for the first six months this year saw a 23 percent year-on-year decline) due to a weaker domestic economy, increasing difficulty in raising credit, and strong equity market in the first five months of the year, which absorbed most of the capital.
Regarding the price outlook, the authors of the report are rather optimistic. They argue that the expected Fed’s interest rate hike “is already priced into the market and that an increase could well prompt review of asset allocations that leads to an increase in gold holdings”. The GFMS team expects that investors could implement then their fresh expectations about the economy and rebalance their portfolios, as historically the U.S. dollar rises ahead of rate increases, but declines thereafter. Additionally, the authors believe that concerns about the economic slowdown and the potential impact of a stronger dollar on the stability of emerging economies may boost safe-haven demand for gold. This is why they forecast an average price of gold at $1,135 in the third quarter, at $1,175 in the last quarter, and at $1,250 in 2016.
The key takeaway is that gold demand remained weak in the second quarter. It seems that the negative sentiment reaches a peak, as we approach a possible Fed interest rate hike this year. However, fear is often worse than reality. After the hike, investors may rebalance their portfolios and increase their gold holdings, especially if they realize the negative consequences of the hike for the stability of emerging economies. Thus, although the GFMS team forecasts a decline in the price of gold in the third quarter, it believes in a rebound as soon as in the fourth quarter.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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