18 Feb 2014
Why gold prices could continue to be supported in 2014
FXStreet (London) - In 2013, gold registered its biggest annual drop since 1981. The 28 percent decline ended a 12-year bull run for the precious metal.
Gold prices had been driven by a weaker dollar and inflationary concerns as a result of US and global monetary easing trends.
However, the prospect of the US Federal Reserve tapering its quantitative easing program deflated the gold market. The implied stronger outlook for the US economy as well as eased inflationary pressures helped to decrease gold demand.
But though we are now in a confirmed tapering cycle, with the Fed trimming its monthly asset purchased by USD10bn at its last two monthly Federal Open Market Committee meetings, the case for gold is not over.
Here are three factors that could support gold prices in 2014:
1 – China
While gold demand in western markets may have been on the wane, demand in China has surged. Gold consumption increased by a huge 41 percent year-on-year to 1,176.4 metric tons in 2013, according to data from the China Gold Association. Output rose 6.2 percent to 428.16 tons. The increase probably means that China overtook India as the world’s largest gold consumer last year.
And while the West has seen some deleveraging, if only in a limited way, China remains highly leveraged. We have all seen the videos of Chinese ghost towns built on credit. And for all the talk of tightening of conditions, yesterday’s data shows that China is doing nothing of the sort. New yuan loans in January totaled a record CNY1,320bn, or USD217bn. This swamps the USD85bn of the Fed’s open-ended QE before tapering started or the Bank of Japan’s JPY7 trillion/USD74bn of local bond purchases.
This huge injection of credit comes shortly after the PBOC tried to tighten conditions. The last time it did this, in December, it had to step in with short-term liquidity obligations to shore up the interbank market after China’s highly-leveraged banks started to squeal.
The Chinese domestic market offers few alternatives for investors, with an underperforming equity market and volatile property market manipulated by government controls. With the PBOC chasing the dragon of liquidity injections, gold will be an attractive asset as a store of value for China’s expanding base of gold consumers as the country faces volatile conditions.
2- Emerging market volatility
The 2013 gold bear market came in a period of prolonged relative market stability. Short-term Eurozone fears had abated, with even Greece showing some signs of recovery. Equity markets surged on central bank liquidity-induced exuberance and Fed outlooks took an increasingly positive note, leaving to an eventual tapering of its QE support. Holding gold had little attraction in a low-volatility environment where the S&P 500 added 30 percent over the course of 2013.
But volatility is back. The emerging markets that gorged themselves on cheap dollar-denominated debt when the Fed was injected liquidity at record levels have now seen their debts become increasingly expensive as the dollar strengthens. In addition, those economies that ran big balance of payment imbalances based on exports to central bank-stimulated economies now find themselves exposed. We have seen Turkey in serious difficulties along with Hungary. And it’s not just the smaller economies. India too is facing increasingly difficult conditions as its fiscal imbalances look precarious after years of high borrowing to fund vast infrastructure projects.
3- Eurozone money printing
To date, one of the few redeeming features of the Eurozone is that the monetary union has refrained from hitting the printing presses. Had that not been the case, it’s unlikely that Greece, Spain or Italy would have held off from trying to Weimar themselves out of trouble, devaluing their currency through aggressive monetary expansion in a bid to inflate their debts down.
Despite the Eurozone’s fiscally reckless policies, with weaker economies taking advantage of access to debt at cheaper levels thanks to the implicit assumption by credit markets that the core would bail out the periphery, from a monetary point of view, the Euro has been more stable than its peers. But with unemployment still running at 12 percent, extremely weak growth outside the core and an accelerating contraction of bank lending to the private sector stifling business growth, the European Central Bank is rapidly running out of monetary bullets.
So far, France seems to have managed to slide from a core Eurozone economy to a periphery economy, running 10.9 percent unemployment with declining inflation and stagnant industrial production. Despite one of the few countries that has been able to make itself worse than at the beginning of the crisis, there has yet to be significant alarm over France’s state. However, should it deteriorate further, it may not be long before Francois Hollande calls out for some monetary expansion to help prop up his failing high tax economy. In such an environment, European investors would rush to the safety of gold in volatile and inflationary conditions.
Gold prices had been driven by a weaker dollar and inflationary concerns as a result of US and global monetary easing trends.
However, the prospect of the US Federal Reserve tapering its quantitative easing program deflated the gold market. The implied stronger outlook for the US economy as well as eased inflationary pressures helped to decrease gold demand.
But though we are now in a confirmed tapering cycle, with the Fed trimming its monthly asset purchased by USD10bn at its last two monthly Federal Open Market Committee meetings, the case for gold is not over.
Here are three factors that could support gold prices in 2014:
1 – China
While gold demand in western markets may have been on the wane, demand in China has surged. Gold consumption increased by a huge 41 percent year-on-year to 1,176.4 metric tons in 2013, according to data from the China Gold Association. Output rose 6.2 percent to 428.16 tons. The increase probably means that China overtook India as the world’s largest gold consumer last year.
And while the West has seen some deleveraging, if only in a limited way, China remains highly leveraged. We have all seen the videos of Chinese ghost towns built on credit. And for all the talk of tightening of conditions, yesterday’s data shows that China is doing nothing of the sort. New yuan loans in January totaled a record CNY1,320bn, or USD217bn. This swamps the USD85bn of the Fed’s open-ended QE before tapering started or the Bank of Japan’s JPY7 trillion/USD74bn of local bond purchases.
This huge injection of credit comes shortly after the PBOC tried to tighten conditions. The last time it did this, in December, it had to step in with short-term liquidity obligations to shore up the interbank market after China’s highly-leveraged banks started to squeal.
The Chinese domestic market offers few alternatives for investors, with an underperforming equity market and volatile property market manipulated by government controls. With the PBOC chasing the dragon of liquidity injections, gold will be an attractive asset as a store of value for China’s expanding base of gold consumers as the country faces volatile conditions.
2- Emerging market volatility
The 2013 gold bear market came in a period of prolonged relative market stability. Short-term Eurozone fears had abated, with even Greece showing some signs of recovery. Equity markets surged on central bank liquidity-induced exuberance and Fed outlooks took an increasingly positive note, leaving to an eventual tapering of its QE support. Holding gold had little attraction in a low-volatility environment where the S&P 500 added 30 percent over the course of 2013.
But volatility is back. The emerging markets that gorged themselves on cheap dollar-denominated debt when the Fed was injected liquidity at record levels have now seen their debts become increasingly expensive as the dollar strengthens. In addition, those economies that ran big balance of payment imbalances based on exports to central bank-stimulated economies now find themselves exposed. We have seen Turkey in serious difficulties along with Hungary. And it’s not just the smaller economies. India too is facing increasingly difficult conditions as its fiscal imbalances look precarious after years of high borrowing to fund vast infrastructure projects.
3- Eurozone money printing
To date, one of the few redeeming features of the Eurozone is that the monetary union has refrained from hitting the printing presses. Had that not been the case, it’s unlikely that Greece, Spain or Italy would have held off from trying to Weimar themselves out of trouble, devaluing their currency through aggressive monetary expansion in a bid to inflate their debts down.
Despite the Eurozone’s fiscally reckless policies, with weaker economies taking advantage of access to debt at cheaper levels thanks to the implicit assumption by credit markets that the core would bail out the periphery, from a monetary point of view, the Euro has been more stable than its peers. But with unemployment still running at 12 percent, extremely weak growth outside the core and an accelerating contraction of bank lending to the private sector stifling business growth, the European Central Bank is rapidly running out of monetary bullets.
So far, France seems to have managed to slide from a core Eurozone economy to a periphery economy, running 10.9 percent unemployment with declining inflation and stagnant industrial production. Despite one of the few countries that has been able to make itself worse than at the beginning of the crisis, there has yet to be significant alarm over France’s state. However, should it deteriorate further, it may not be long before Francois Hollande calls out for some monetary expansion to help prop up his failing high tax economy. In such an environment, European investors would rush to the safety of gold in volatile and inflationary conditions.