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)|