The gold price trend for 2015 remains sideways. But, there are several catalysts that can drive gold prices higher. The forecast for gold prices in 2015 and beyond may not be as pessimistic as investors assume.
Gold Price Trend: 2011 to 2015
After gold prices reached a high in August of 2011, they declined over 40%. To date, the gold price trend remained negative. On the way down, gold continued to reach lower lows and rally to lesser highs—signaling a lasting one-way trade.
Chart courtesy of www.StockCharts.com
Gold bottomed toward the end of October 2014, at $1,130 an ounce. Throughout 2014, precious metal investors were focused on the wind-down of Federal Reserve quantitative easing operations. Gold buyers began evaluating the prospects of a shift in monetary policy and a rise in interest rates. Prices went lower, ignoring the fundamental signals supply and demand conditions were sending investors.
A Shift in Gold Supply and Demand
Despite the strong price decline, supply and demand conditions in the gold market have been relatively stable. After 2011 gold price highs, supply declined by about one percent on average. Demand also fell, but not as drastically as many market participants imagine.
Physical demand fell from 4,515 tons in 2011 to about 4,158 tons by 2014 year-end. That equates to roughly a two-percent decline on average since 2011—not a 40% drop. (Source: Thomson Reuters GFMS Gold Survey 2015, last accessed May 12, 2015.)
Demand remains persistent. Physical demand for gold stems from jewelry consumption and fabrication, industrial fabrication, and retail investment into gold bars and coins.
The demand total exceeded supply in 2013 by an unprecedented 15%. A year down the road, in 2014, gold supply only exceeded demand by five percent. In the first quarter of 2015, supply remains only four percent higher. Only recently has gold supply inched higher, above demand. Again, not by 40%, but a mere five percent. (Source: Thomson Reuters Q1 Gold Survey, last accessed May 12, 2015.)
Tight conditions can easily reverse, as retail demand is the most dynamic of the physical demand components. The buying of bars and coins by retail investors has grown from a total of 416 tons in 2005 to a sum of 1,079 tons at 2014 year-end.
Retail investment is driven by sentiment toward gold and speculation around future gold prices. The outlook can shift without notice. And the resulting prices paid for an ounce of gold can be stretched beyond fundamentals. The ground underneath the gold bear may be shifting, as bullish sentiment has a powerful driver.
U.S. Dollar and Gold Price
The U.S. Federal Reserve interest rate change, slated for September or December of 2015, is to a large extent priced in by gold markets.
Anticipation of an increase in interest rates acted as a deterrent to higher gold prices. In fact, with steady supply and demand conditions, gold prices were driven lower by the prospects of steadier economic conditions (post-financial crisis), and higher U.S. interest rates ahead.
Expectations of a return to normal in economic conditions drove the U.S. dollar higher. But, currency strength is always relative. If the price of one currency rises, the currency against which it is traded must necessarily decline. The U.S. dollar has been strong recently, relative to its peers.
The U.S. dollar gained against the euro, where quantitative easing kicked into gear in March of 2015. The printing of money, under the guise of asset purchases, is expected to total $1.1 trillion and run through September 2016, signaling a stronger U.S. dollar.
The greenback also strengthened versus emerging market currencies, whose value is dominated by the collapsing price of commodities. For example, the widely followed S&P GSCI Commodity Index, which tracks a milieu of commodities, declined nearly 50% from 2011 highs to January 2015 lows. Currencies heavily tied to commodities have followed. Conversely, the U.S. dollar rallied.
So, the U.S. dollar is not necessarily strong based on intrinsic fundamentals like a superior economy, but is strong against a weak macro environment.
Gold bulls can relish in the fact that the current stall-speed global economy bodes well for the trend in gold prices. The gold price forecast will also benefit from the potential increase in financial instability and inflation, due to the distortions caused by quantitative easing.
Gold Price Forecast 2015
The chart below plots the U.S. dollar index (in green), and gold prices (in orange). The U.S. dollar peaked in late March and gold simultaneously bottomed. The relief in the rally of the U.S. dollar looks good for gold prices throughout the remainder of 2015.
Chart courtesy of www.StockCharts.com
After bottoming at $1,130 an ounce, gold has been range-bound between $1,140 and $1,310. If gold prices break key support levels at $1,100 and the physiological $1,000 mark, there is no telling how far the price can fall. Conversely, if gold prices break out above $1,300 levels, a strong rally will ensue.
Gold prices are currently trending in a sideways direction. But the rally in the U.S. dollar has lost steam—giving gold prices room to breathe. And while higher interest rates may be ahead, the gold price already discounts the move higher. The next move in gold prices may be driven by investor inflation expectations.