Gold: Assessing The Impact Of Fixed Income Strength

We remain neutral gold on a three-month basis and bearish over the longer-term. A gradual easing of geopolitical risks to the global economy combined with monetary policy normalisation in the US will drag prices lower in 2015. We forecast the first rate hike by the US Federal Reserve in H215.

Nonetheless, the outlook for gold prices has improved since mid-year and we see modest upside risks to our below-consensus average price forecast of USD1,200/oz for 2015. The significant compression in developed market fixed income yields over recent months has taken us somewhat by surprise and suggests that real yields could remain anchored for longer than we previously anticipated. As we expect physical demand from Asia to remain stable in the coming quarters, developed market demand will remain the key swing factor for gold prices. Continued low real interest rates in the US and eurozone going into 2015 would bolster developed market demand for gold by keeping the opportunity cost of holding gold as an investment low.

Still Bearish...
Spot Gold, USD/oz (daily chart)

We remain neutral gold on a three-month basis and bearish over the longer-term. A gradual easing of geopolitical risks to the global economy combined with monetary policy normalisation in the US will drag prices lower in 2015. We forecast the first rate hike by the US Federal Reserve in H215.

Still Bearish...
Spot Gold, USD/oz (daily chart)

Nonetheless, the outlook for gold prices has improved since mid-year and we see modest upside risks to our below-consensus average price forecast of USD1,200/oz for 2015. The significant compression in developed market fixed income yields over recent months has taken us somewhat by surprise and suggests that real yields could remain anchored for longer than we previously anticipated. As we expect physical demand from Asia to remain stable in the coming quarters, developed market demand will remain the key swing factor for gold prices. Continued low real interest rates in the US and eurozone going into 2015 would bolster developed market demand for gold by keeping the opportunity cost of holding gold as an investment low.

...But Fixed Income Rally Is A Net Positive
Generic 10-Year Government Bond Yields, %

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