Gold prices buffeted by conflicting global trends

By Wang Juan Source:Global Times Published: 2017/11/19 20:28:39

Illustration: Luo Xuan/GT


Gold prices have risen more slowly in China than in the global market this year. As of Tuesday, the price of international spot gold had risen by 11.14 percent since the start of the year, while the domestic gold price rose by only 3.83 percent. And in China, gold prices have been on a downtrend since September. Why has there been such a difference in the global and domestic gold markets?

The first reason is the tightening of global monetary policy, with major central banks such as the Bank of England and the Bank of Canada raising rates in September. We can see there has been a normalization following years of slack monetary policy designed to boost growth.

In October, the US Federal Reserve started a program of substantial reduction in asset purchases and the European Central Bank also announced a reduction of its bond-buying program.

Second, inflation is gradually picking up. In the US, the wage level rose in September. And a recent batch of economic indicators have pointed to growing strength in the US economy. In addition, international oil prices increased sharply in September and October, so the inflation rate is expected to continue rising.

In the second and third quarters, gold demand dropped. The global gold demand in the third quarter totaled 915 tons, down 9 percent year-on-year, of which the total demand for gold ornaments experienced a 3.2 percent year-on-year decline. This was due to a large extent to changes in the Indian market, with tax system and regulatory changes in India affecting the country's gold consumption. Besides, the aggregate gold investment fell 28 percent year-on-year, mainly because global stock markets, especially the US stock market, have been stronger this year, encouraging investors to put their money into riskier assets with higher potential returns.

The rise in US interest rates and increasing inflation also had the effect of strengthening the US dollar and this weighed on gold prices as well.

As for the remainder of this year, market watchers are waiting to see if the Federal Reserve will hike rates again in December. But even if it does, the negative impact on gold prices is getting weaker. It is estimated that even if US interest rates are raised in December, the drag on gold will have been digested by the market in advance. A greater threat to gold will be the potential tax reform in the US. However, given the various obstacles the policy is facing, the tax reform may not happen.

Currently, turmoil in Saudi Arabia is also causing market fluctuations. This has pushed up oil prices to the highest level in over two years, and has also lead to risk aversion in the global market, which has provided some support for gold.

In terms of supply and demand, although global gold demand decreased in the third quarter, supply has also fallen by 25 percent, partly because the world's major mines have cut production in 2017. Due to the current mining situation, a relatively steep decline in gold production will be seen in the next five to 10 years.

In the third quarter of 2017, the gold reserves of global central banks rose by a total of 111 tons, an increase of 25 percent. Nine-tenths of the purchases were conducted by buyers like Russia, Turkey and Kazakhstan. According to official statistics, China stopped buying gold this year, and the nation's current gold reserves are equivalent to only 2.4 percent of its foreign exchange reserves. As this amount is relatively small, it is estimated that China will bolster its gold reserves at some point next year.

Generally, in the short term, two major factors will affect the gold market. The first is the possible negative influence from US policy, and the second might be support deriving from the unstable Saudi political situation. This makes it hard to predict what will happen with gold prices, currently. However, the favorable conditions offered by overall supply and demand will continue to provide support for gold prices in the medium to long term. In my opinion, international spot gold is not likely to fall below $1,200 per ounce. In terms of further expectations, I believe there may be a continued slow rising trend in gold prices.

The author is a nonferrous metals analyst with Guoyuan Futures.

Posted in: INSIDER'S EYE

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