The banking and financial services giant HSBC stated in its latest gold analysis that the demand for jewellery, coins and bars coming from China and other emerging markets will be the key driver for gold prices in 2014. The metal had previously slumped into a bear market in April as investors lost faith in the metal as a store of value amid an equity rally and muted inflation. Exchange-traded funds (ETFs) that track gold lost $73.4 billion in value last year, but the report forecasts that the dramatic outflows from gold ETFs will stabilise as a result of demand from emerging markets.

 New Drivers

 HSBC believes that investment demand in the past was the primary driver of the rally in gold prices over the last decade. This investment demand has largely dried up now, and no longer defines gold price movements. Instead, fluctuations are catalysed by the rising demand for physical gold coming from China and other emerging economies. These new markets have become the key driver of bullion prices in 2014. The growing appetite for gold in China helped the country to overtake India as the world’s largest bullion consumer in 2013. The gold demand is expected to remain high throughout the year, with the market for gold demand out of the Chinese mainland looking robust.

 Forecasts

 Gold backed ETFs witnessed heavy selling in 2013, to the tune of 881 tons of bullion. The recent report hypothesises that gold outflows will show a dramatic deceleration over the coming months, as remaining holders are most likely to be long-term holders. Based on the apparent recovery of gold prices, it must be assumed that ETF outflows have been categorically exhausted. Current forecasts suggest that not only will outflow be stemmed, but there will actually be a net ETF addition of 90 tons this year alone.

 The bank has left price forecasts for gold unchanged for 2014, with an average of $1,292 per ounce, below current levels of $1,350. However, despite last year’s 28% fall, Barrick Gold Corp, the world’s largest producer of the metal, estimates that gold will have risen to $2,000 by 2016, retesting previous highs.

 Analysts are split, however, on the current outlook for prices. Gold for immediate delivery now stands at $1,334.47 an ounce in London. Goldman Sachs Group Inc. last month reiterated its forecast for the metal to reach $1,050 by the end of the year. Westpac Banking Corp sees bullion dropping to $1,011 by December 2014. UBS AG’s opinion stands in opposition to these forecasts. Many commentators have noted that the negative sentiment surrounding the metal has seemingly dissipated, citing the increased buying of ETFs. On February 19^th UBS stated that the commodity had ‘started to shed its stigma’, and thus increased their 2014 forecast to $1,300 from $1,200.1

 The business of investing does not deal in certainties. As Sanlam Private Investments have stated, ‘Investing involves risk and the value of investments and the income from them may fall as well as rise.’ It is impossible to say with certainty how the gold market will stand in ten years, or even one. Rising economic stars such as Indonesia may have come into play by 2016, with demand from their economy driving gold prices. Conflicts such as the current Ukrainian crisis can also have an impact. There is no crystal ball to warn us of global events which might have an effect. All we can know with any degree of certainty is that it’s important to find a trusted investor with the expert knowledge to invest your money wisely, and minimise risks as far as possible.

Categories: Precious Metals Market