Views Update: Bearish Gold

We have entered a bearish gold view into our commodities strategy table, targeting a move down towards US$1,200/oz over the coming months. This would represent a decline of 9.9% from current levels.

Admittedly, geopolitical tensions surrounding secession risks in Ukraine could marginally bolster prices in the near term as investors edge back into perceived safe haven assets. However, given our core view is that the likelihood of an escalation towards outside military involvement in Ukraine is low, we see little chance of a dramatic flight to safety at this stage. Instead, the key driver of gold prices in the coming months will be a continued recovery in the US economy and the consequent grind higher in US Treasury yields. While we do not expect a repeat of the mass liquidation of gold investments that occurred in 2013, a rising opportunity cost of holding gold will keep pressure on ETF holdings and undermine prices over the course of 2014. Given this fundamental outlook, the timing for a bearish view looks attractive. Momentum indicators are overstretched and suggest that the recent rally in gold prices will face a significant hurdle in the US$1,350-1,400/oz area.

We recognise several upside risks to this bearish gold view and would likely remove it from our strategy table should prices move decisively above US$1,350/oz. Aside from the risk of events in Ukraine igniting a flight to safety, which we have outlined above, Indian trade policy remains an upside risk to prices. Anecdotal evidence suggests that Indian authorities could relax current restrictions on gold imports over the coming weeks. Such a decision would likely result in a temporary surge in Indian gold imports and could provide a temporary boost to prices.

Up Against It
Spot Gold, US$/oz (Daily, with RSI)

We have entered a bearish gold view into our commodities strategy table, targeting a move down towards US$1,200/oz over the coming months. This would represent a decline of 9.9% from current levels.

Up Against It
Spot Gold, US$/oz (Daily, with RSI)

Admittedly, geopolitical tensions surrounding secession risks in Ukraine could marginally bolster prices in the near term as investors edge back into perceived safe haven assets. However, given our core view is that the likelihood of an escalation towards outside military involvement in Ukraine is low, we see little chance of a dramatic flight to safety at this stage. Instead, the key driver of gold prices in the coming months will be a continued recovery in the US economy and the consequent grind higher in US Treasury yields. While we do not expect a repeat of the mass liquidation of gold investments that occurred in 2013, a rising opportunity cost of holding gold will keep pressure on ETF holdings and undermine prices over the course of 2014. Given this fundamental outlook, the timing for a bearish view looks attractive. Momentum indicators are overstretched and suggest that the recent rally in gold prices will face a significant hurdle in the US$1,350-1,400/oz area.

Sentiment No Longer At Bearish Extreme
Gold - Bloomberg Sentiment Survey (Spread of Bullish - Bearish)

We recognise several upside risks to this bearish gold view and would likely remove it from our strategy table should prices move decisively above US$1,350/oz. Aside from the risk of events in Ukraine igniting a flight to safety, which we have outlined above, Indian trade policy remains an upside risk to prices. Anecdotal evidence suggests that Indian authorities could relax current restrictions on gold imports over the coming weeks. Such a decision would likely result in a temporary surge in Indian gold imports and could provide a temporary boost to prices.

Global Commodities Strategy
Entry Date Entry Level Gain/(Loss) Rationale
AGRICULTURE
Bullish May 2014 LIFFE Cocoa 31-Jan-14 1,844 -0.60% Persistent market deficits due to improving global demand and stagnating global supply growth
Bearish front-month CBOT wheat 27-Feb-14 597.0 0.00% Easing weather problems in the US, moderating import demand and strong prospects for the coming 2014/15 crop
ENERGY
- - - - -
METALS
Bearish Iron Ore (SGX third-month swap) 09-Jan-14 126.3 9.55% Chinese import growth to slow, supply to improve.
Bearish spot gold 27-Feb-14 1,332 0.00% US yields to grind higher, reducing attraction of holding gold as investment
Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg

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Related sectors of this article: Commodities, Gold, Precious Metals
Geography: Global, Asia, China, United Kingdom, India, Thailand
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