Implications Of Falling Gold Prices

Gold prices are in freefall and will likely head even lower in the coming weeks. Supportive fundamentals have been gradually shifting in recent months, undermined by a steady improvement in the US economy. Stronger US growth means that expectations of a tapering off of quantitative easing (QE) have been brought forward, with bearish implications for gold.

The dramatic sell-off since last Friday, April 12 has been catalysed by a break of key technical support at US$1,520/oz.

Gold Prices, US$/oz

We expect that trading will be volatile, but the key point is that gold has peaked. We revised down our average gold price forecast for 2013 to US$1,575/oz on April 12, but could be forced to lower this further in the coming weeks, once the dust settles.

This bolsters our constructive view towards the US dollar.

From a sectors perspective, we see significant risk to the capital expenditure plans of major mining firms that had been pencilled in for the coming years. For areas such as Central America, where significant gold mining investment had been planned, expectations will likely have to be tempered.