Is Gold to remain in bullish territory for the remainder of 2014?

April 27, 2014

By: Aamir U Soomro

Gold is arguably the most controversial commodity in the world at the moment, with everyone from the Oracle of Omaha to the outgoing chairman of the US Federal Reserve forming a decisive opinion on tithe precious metal baffles many savvy investors day in and day out with its volatility on a daily basis, with bulls and bears fireclay divided on its “intrinsic” valuation. The precious metal however is back with a bang this year gaining 10.4% to date, after an abysmal preceding year with gold loosing 28% of its value in 2013, ending its colossal 12 year long bull run.

There are a multitude of factors that have caused gold to have a bearish run in the past year. The main factor being the rapid rise of the US equity market last year, with most of the major US indices returning up to 30% last year, which in turn caused the precious metal to loose its place as a hedge against inflation in uncertain economic times, consequently, fortifying its position in the bear market. Moreover, the US Federal Reserve trimmed its bond buyback purchases last year by US$10 billion a month, which further caused gold to retreat into bearish territory, as the precious metal lost its position as a hedge against inflation in a volatile capital market.

The recent support for gold’s bullish run stems not from the underlying macroeconomic variables outlined above but rather from a relatively simple manifestation of physical demand and supply. Demand for the precious metal in terms of gold bars, jewellery and coins in emerging markets such as China and India is increasing as the economies of both countries have increased consumer spending amidst an economic policy shift from export and investment driven growth, which has allowed domestic consumption for gold laden “luxury” items to increase. The physical demand for gold in China as a consequence of the aforementioned reasoning, according to analyst estimates is set to increase 5% on for a year-on- year basis to 2310 metric tons for 2014.

It is widely believed by analysts that the physical demand for the precious metal, will help keep a floor on gold prices within two standard deviations of the US$1300/ounce price point range, while improving US equity markets coupled with a rising US dollar and continuation of the Federal Reserve’s quantitative easing program could cause some resistance for the precious metal within two standard deviations of the US$1350/ounce price point target range.

However, with the recent crisis in the Ukraine alongside the “soft” economic recovery in the US, coupled with volatile US equity markets and varying statements from the US federal reserve regarding the timing of the quantitative easing program, the case for gold’s sustained bull run can be made as the precious metal comes back in vogue as a hedge against inflation and uncertainty in tumultuous economic conditions. The aforementioned notion is supported by the fact that ETF gold holdings rose 6.9 metric tons to 1,746 tons in February, the first monthly gain since December 2012, according to Bloomberg. The big players are also getting in on the action as an assortment of hedge funds and portfolio managers boosted their gold net-long position, or bullish bets, by 25 percent to 113,911 contracts in the week to Feb. 25, the highest since December 2012, according to data obtained from the U.S. Commodity Futures Trading Commission.

In conclusion, the sustainability of gold’s bullish run in 2014 is difficult to predict at this point in time. The macroeconomic fundamentals surrounding gold are sound but the resurgence of the US equity market analogous to the situation witnessed in 2013 can quickly deplete any gains the precious metals has made this year, causing the precious metal to exit the bullish market. On the other hand, global macroeconomic events such as: another Ukraine like political situation, liquidity crisis in emerging markets, slowing economic growth in China, fluctuations of the US dollar in comparison to a basket of well diversified foreign currencies and the timing of the US Federal Reserve’s quantitative easing program can all potentially cause gold to solidify its position in the bull market for the remainder of 2014.

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