Steel forecasts gold prices rising but range-bound, averaging $1,234 an ounce in 2015 and then $1,275 next year. He sees gold ratcheting higher to $1,300 in 2017, a level that’s 10% higher than current prices, near $1,180 an ounce. Speculative investors have been driving gold’s price trajectory for a long time.
Many bulked up on the yellow metal, betting that aggressive easy-money policies from central banks would stoke global inflation. Stark rises in prices haven’t materialized, gold has wobbled since peaking in late 2011. Money has poured out of exchange-traded funds such as the SPDR Gold Shares (GLD) ever since.
HSBC explains what gold has going for it now: 1) the flood of money out of ETFs has slowed; 2) overseas central banks like Russia and Turkey are going to be incremental buyers; 3) expectations for the dollar’s strength to be more moderate from here (gold and the dollar tend to have an inverse relationship, mainly because gold is priced in dollars, so it becomes expensive to buyers overseas when the greenback advances).
Above all, Steel says the future for gold is all about emerging-market demand for jewelry, and coin and bar purchases. Jewelry account for more than half of the physical gold consumption.
Lower gold prices are good for gold buyers now, but also limit the potential for gains, because buyers of gold for jewelry are sensitive to higher prices: “Investment demand in particular has long wielded significant influence over gold prices, especially in the short term. …
Several emerging markets, notably China and India, now dominate physical demand for gold and account for a substantial proportion of global gold holdings.
As Western investment demand for gold remains generally sluggish, demand flows in the East take on increased importance for prices. With this also comes a shift in the price elasticity of demand. Western buyers tend to be less influenced by pricewhen making jewelry purchases and more by the economic climate, especially employment and personal income levels. In contrast, EM buyers are more influenced by price.
High prices have a dampening effect on more price-sensitive buyers in economies with limited discretionary consumer incomes. Two of these emerging markets – India and China – alone account for nearly two thirds of global gold jewelry demand.
Conversely, a plunge in prices can quickly encourage fresh physical gold demand, as consumers with limited incomes secure gold at lower prices. This pattern will help support prices on downswings as well as contain or cap rallies.”
barrons.com
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