GFMS: Western Demand To Drive Gold Prices As Asia Slows

(Kitco News) - Factors that helped boost western gold demand to unprecedented levels will continue to play a role in the second half of the year, according to one major precious metals research firm.

Tuesday, GFMS Thomson Reuters released its second quarter Gold Survey and Outlook report, upgrading its average gold price for 2016 to $1,279 an ounce, up from the previous forecast of $1,184 an ounce.

“The revision is a mark to market of the impressive gains that gold has posted so far this year, and reflecting the changed sentiment stemming from increased uncertainty from economic and political outlooks,” the analysts said in the report.

In a webinar following the release of the report, the analysts explained that gold prices are being driven by renewed western investment demand, particularly demand for gold-backed exchange-traded funds. They noted that ETF demand in the first half of the year set a record with global gold reserves increasing by 568 tonnes.

However, they described Asian gold market as lackluster with demand, led by China and India, falling to seven-year lows in the second half of the year.

The Brexit vote lit the fuse that caused the explosive rally in the yellow metal at the end of the second quarter, but the analysts noted that the rally was already well established in a world of growing negative bond yields and shifting U.S. interest rate expectation.

Looking ahead, the analysts said that they expect Brexit uncertainty will continue to be felt in financial markets, driving demand for gold in the second half of the year.

Saida Litosh, senior analyst for the research firm, said that although volatility has come down since the June 23 referendum, it still remains elevated. “We believe that gold will continue to benefit as a risk hedge,” she said.

While markets will continue to keep an eye on a fallout in Britain and Europe, the analysts said that new drivers for the gold market could be a weakening Italian banking sector, lower interest rate expectations and the U.S. presidential elections in November.

Eric Rannestad, senior analyst for GFMS, said that there is uncertainty from both sides of the spectrum and investors could see a reaction in gold no matter which party wins the presidential race.

Ross Strachan, manager at GFMS, speculating on the U.S. election’s impact on gold, said given that Brexit caused gold to rally $100 an ounce and because the U.S. economy is five or six times larger, investors could expect to see an even bigger reaction to the election results.

However, it wasn’t just ETF demand that drove the gold market in the first half of the year. Retail demand, in particular coin bullion demand, was also unprecedented with Rannestad noting that all major mints saw significant increases in coin sales.

However, specifically, she said that North American market was the bright spot for this sector as the U.S. Mint sold 21.1 tonnes of gold bullion coins in the first half of the year, with more than half of the demand coming in the second quarter.

“Retail investment demand is expected to be weak during the summer months. Already, the U.S. Mint has seen sales drop 5% in June from year ago levels. Demand for coins and bars could pick up in the fall however, ahead of the Presidential election in November,” she said.

While the analysts are optimistic on gold for the rest of the year, they also noted that the market still has its risks. Litosh noted that speculative long positioning in gold is at record levels and “a shift in investor sentiment or profit taking could lead to a new downtrend.”

Courtesy: Kitco News