Robin Bhar, Research Analyst at Societe Generale, suggests that they remain bearish about the gold price over the forecast period.
“However, we have increased our average gold price forecast for 2016 to $1,150/oz, in part because of gold’s stellar start to 2016. However, we believe that the rally is not built on solid foundations, as gold will come under continued pressure in a rising interest rate environment.
Having hit a multi-year low in the final weeks of 2015 in dipping below $1,050/oz, the gold price shot up in early 2016, and by mid-February it was in excess of $1,250 as it gained from safe-haven flows. Thereafter, the metal has shown some resilience despite some easing in market tensions.
A key vehicle driving the improved price performance in gold so far in 2016 is the pick up in gold ETF holdings. In the first two months of 2016, total holdings in gold ETFs rose by 283 tonnes to 1,813 tonnes, reversing all the losses since March 2014. The pace of increase was the fastest since the second quarter of 2010 and indeed even led to a temporary inability for one ETF to increase holdings as additional shares had to be registered with the Securities and Exchange Commission.
Underpinning this increase, which was chiefly in the US, was market turmoil fuelled by a combination of fears of China and/or the US heading into recession. This was compounded by the prospect of negative interest rates becoming more widespread given the economic woes across the globe.
In stark contrast, and raising significant questions about the sustainability of the rally, physical demand from both of the global powerhouses, India and China, has been lacklustre at best thus far in 2016. In fact, anticipation of the Indian budget and then the strike by jewellers following it has caused many to describe this market as painfully quiet in recent weeks, and the market has been trading at a large discount.
Chinese demand for gold bars, particularly large investment bars such as 500g and 1,000g, has at least been more positive since the fourth quarter due to Chinese gift giving for the lunar New Year. This should be put in context though, as the much larger jewellery sector has seen demand drop back by around a third.”
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