Although gold has consolidated above $1,100 an ounce Tuesday, its recent plunge is still a fresh memory which hardly promises a surge in the short-term. Analysts, however, do not consider the recent decline to linger.
Over the past week, a series of events and trends have come together "to create what looks like a perfect storm for gold," said Colin Cieszynski, chief market strategist at CMC Markets.
He underscored four significant factors:
1) U.S. interest-rate hike and greenback rally
The risk of
financial crises in Europe and worries that China could spiral out of
control and disrupt the world economy have eased, with the Fed being still on track to raising rates.
2) Less demand for defensive havens
Gold is less needed as a shelter as the risk of Grexit eased, and geopolitical tensions around the world also appear to be lower with the completion of the Iran deal and the U.S. and Cuba rebuilding relations.
3) Less need for inflation hedges
With Iran bracing for a return to the oil market amid a continuing supply war among other producers, the price of oil has tumbled back toward $50 a barrel.
That means “headline inflation looks likely to remain subdued for some time,” Cieszynski said.
4) China and its gold cache
On Friday China released data on its gold holdings for the first time since 2009. Its reserve climbed by about 60% from 2009 to 1,658 metric tons, which would have been great for gold, but unfortunately, gold only represents about 1.5% of China’s forex reserves and this percentage has not grown in the last six years "crushing hopes China would save the gold market,” Cieszynski commented.
Meanwhile, some analysts consider that the yellow metal is near its absolute bottom.
Brien Lundin, editor of Gold Newsletter, for instance, thinks the current prices are near the absolute low. The price drop “isn’t something that we would expect to extend much further, or last for an extended period of time.”
“Gold is trading below the all-in cost of production for many of the world’s gold mines,” he said. “If prices persist at these levels, supplies will begin to decline while Asian buyers ramp up their buying.”
Taking it into account, the analyst expects “at least a bump” in gold prices by this autumn, which would push well-positioned mining equities much higher from where they currently are.
