What to expect on the gold market in the next quarters?

Summary:

• Demand situation on the gold market is puzzling

• Supply may turn to be a trigger for a rebound

• Market factors seem to favor gold

• Barrick Gold interesting alternative to gold investments

Will 2019 be marked by the gold price rally?

Investors from the gold market cannot say that 2018 was a good year. Price of the precious metal traded even 13% lower at one point but solid end of the year helped recoup part of the losses and in turn gold finished year 8% lower. Gold trades 8% above the local low from August but the beginning of 2019 was marked with relative underperformance. Gold price is virtually unchanged in comparison to two weeks ago. Having said that, the question remains whether gold will be able to push higher in 2019 or are we set to experience continuation of sideways trend started in 2014?

Fundamental situation on the gold market

Gold price movements are to huge extent dependant on USD and Treasury yields. Gold is also treated as safe-haven asset but 2018 showed that strengthening of the USD is able to offset any possible price increases resulting from increased volatility.

On the first glance, we can see that the demand side copes quite bad. There are few reasons behind it. Firstly, jewellery demand’s momentum remain lacklustre (jewellery accounts for 50% of physical gold demand). Secondly, investment demand shrinked recently (upper chart, jewellery demand - blue color, investment demand - green color). On the other hand, supply remained rather flat for the past few years. After period of rising mine production, growth diminished and production stalled. Situation reflects concerns of the mining industry that investments needed to expand production are not being made.

Demand for gold shrinked mostly because of a drop in the investment demand, especially from ETFs, as well as lack of growth in the jewellery demand. Source: WGC, XTB Research

How does the situation looks according to seasonal patterns? Unfortunately, it does not look good for bulls. Seasonal patterns more than justify what happened on the gold market throughout the major part of 2018. Jewellery demand performed weakish in comparison to the 5-year and long-term averages. Investment demand also looks very weak. On the other hand, industrial demand is rising as production of electronics and development of new technologies requires more and more gold. Gold demand may have started a positive trend in the fourth quarter of 2018 but we are yet to see this as WGC data is usually release one or two months after quarter’s close.

Breakdown of total gold demand on investment, industrial and jewellery demand. Source: WGC, XTB Research

Some optimistic signs for bulls can be spotted. Namely, demand from central banks increased significantly. China for the first time in years increased their holdings but Russia remains the world’s second largest holder of gold (after the US). It may mean that this countries are build reserves ahead of the potential economic slowdown. Another pleasing factor for gold prices is trend reversal when it comes to mine production. Lack of new investments among mining companies hint that output growth may be stalled while recent abundance of M&A deals in this industry signals that it has matured. Relatively low gold prices do not bode well for investment activity of mining companies.

According to WGC data as well as GFMS forecasts, it turns out that in 2018 we may have experienced a drop in the mine production. Such a situation may extend into 2019. Chart below depicts production shifts among major gold mining countries.

Production forecasts do not look optimistic for the mining industry but look favourable for gold bulls. In theory, smaller supply should support prices. Source: WCG, GFMS, XTB Research

Market factors suggest higher gold prices

The US dollar is placed among the most important factors affecting gold prices. We think that the buck is overvalued when measured by a REER approach. The chart below presents the US dollar performance over the past years suggesting that we could be at the beginning of a larger pullback - basically the new bear market. This view is underpinned by monetary policy in the US where the Fed is expected to hike rates only twice before it begins lowering them. If the dollar moves lower, this could act in favour of higher gold prices.

We could be entering the broader bear market in the US dollar. Source: Elliotwave Forecast

Other positive factors could be found as well. Note that an investment demand from ETFs has rebounded. Those funds have increased their exposure to gold notably since October. On top of that, speculative investors begin buying gold as well which may bode well for gold prices in the weeks to come.

A net speculative position has risen recently. Source: Bloomberg, XTB

Technical analysis and a look at other markets

Gold prices have been rising since August 2018. Since then we have had only one correction which occurred in late October/early November (ca. $45). The commodity price is currently retreating from $1300 per ounce. The latest weekly candlestick showed a long wick, and the currently forming one signals some difficulties ahead of bulls. If this week ends below $1290, it could push the price lower toward $1260 per ounce. Note that over the recent hours we’ve got some arguments behind lower gold prices such as rises in the US stock market, higher bond yields as well as higher copper prices.

Gold prices could start a pullback. Nevertheless, we expect the gold price to rise in the medium- and the long-term, but those possible gains could be limited to $1350/$1380. If market sentiment continues aggravating, it could push prices even toward $1400. Source: xStation

Barrick Gold looks curiously

Barrick Gold is a Canadian company which extracts gold, however, this company is listed on the US stock market. Comparing Barrick Gold to its peers one may arrive at a conclusion that the Canadian firm looks better mainly due to a numerous takeovers and remarkably low operating costs (one of the lowest in the world - roughly $600 per ounce).

Shares of Barrick Gold have performed better compared to other indices tracking major gold producers. The most recent falls could be tied to uncertainties with regard to some takeovers the company made. However, at the current levels this company looks attractively. Source: Bloomberg