Here are some reasons to be optimistic about gold’s prospects in 2015, according to analysts at RBC Capital Markets.
Exchange-traded-fund liquidations are a major culprit for the weakness in gold prices as an estimated 33 million ounces have been sold in the past two years. That brought gold ETF holdings to a level not seen since prices were near US$1,000 an ounce in 2009. However, the pace of sales has slowed recently.
Central bank buying
Central banks purchased 93 tonnes of gold in the third quarter, bringing the year-to-date total to 335 tonnes, versus 324 tonnes in 2013. At the same time, recycling supply has dipped to 807.2 tonnes, the lowest level since 2007 and 35% below the 2009-2012 average.
“Scrap sales of gold have waned and the physical market has tightened,” RBC said.
Demand linked to India’s wedding season and Diwali has produced two consecutive months of 100-tonne-plus consumption. That strong demand is expected to continue as the calendar year winds down and Chinese New Year approaches.
RBC noted that spot market premiums have risen to US$18 per ounce in India and US$2 per ounce in China after sitting in flat or negative territory in recent months.
The European Central Bank plans to expand its balance sheet by as much as €1-trillion. With executive board member Yves Mersch commenting that gold buying could be part of the asset-purchase program, expectations and, therefore, demand may rise due to potential ECB investment in the yellow metal.
The one- to six-month forward curve has been in backwardation since mid-September. In other words, gold futures contracts are lower than the spot price.
Lower interest rates are a factor, but RBC noted that gold lease rates are what really drives backwardation.
“The rising lease rates indicate tightness in the physical gold market and lending rates tend to rise as holders of bullion become more risk averse and in many cases higher lease rates lead gold price rallies,” the analysts said.
Russia has accumulated approximately 150 tonnes of gold so far in 2014, exceeding its 78 tonnes of consumption in 2013 and 75 tonnes in 2012. RBC believes attempts to diversify the country’s reserve base with gold could lead to more uptake of domestic supply, which could total as much as 250 tonnes this year.