Outlook for gold dependant on oil prices and the US dollar by Jayant Raniga
Gold seemed set for another flattish year in 2015 after dipping by nearly 2 percent in 2014, with the focus of investors firmly on the timing of a possible U.S. interest rate rise as the world’s biggest economy was heading for a steady recovery.
Bullion had ended 2014 at below $1,200 an ounce or £24.90 per gram of fine gold, just slightly down from a year earlier, weighed by weak oil prices, a stronger U.S. dollar and strong expectations of rising U.S. rates in 2015.
In a strong start to the New Year, gold rebounded from a one-month low on January 2, as weaker-than-expected U.S. manufacturing data fuelled speculation that the U.S. Federal Reserve would delay raising interest rates as economic weakness abroad began to hamper the U.S. economy.
Further prospects for a softening pound against the U.S. dollar were dashed with the Bank of England inflation reports in January indicating that the UK may also increase interest rates later this year. Any deflationary pressures that exist were considered temporary due to record low oil prices impacting on the retail price index and therefore not something that the Bank of England will need to worry in the short-term. This has offered an opportunity for UK based gold investors to buy gold during price-dips.
January saw that the pound had fallen around 11 percent against the dollar in the past six months and many commentators believed that sterling was set to drop further. Investors had pushed back expectations of when the Bank of England will raise interest rates as the UK economy picks up, possibly into next year, putting further downward pressure on the pound.
Fundamentally, the gold price seems to be caught between upside pressure due to its status as a safe haven owing to uncertainty over the Greek economy and political turmoil in the Middle East and Ukraine, and downside forces due to expectations that the U.S. Federal Reserve will eventually hike rates.
The surge in the price of gold this year was initiated when the Swiss National Bank surprised the world by removing the Swiss Franc ceiling against the Euro in expectation that the European Central Bank will announce quantitative easing later this month.
As the year ended in 2014 the outlook for gold depended on oil prices and the US dollar. Prospects for gold prices in 2015 will be tied to expectations of a stronger U.S. dollar and weak crude oil prices, creating potential bargain opportunities for bullion. Oil prices recently hit five-year lows due to over-supply, dragging down commodities across the board, including gold.
Gold had slid to a four and a half year low at the beginning of November to $1145 per ounce, creating bargain opportunities for investors who believe gold will eventually benefit as a hedge against economic uncertainties in the future.
The slide in gold to its lowest level since April 2010 was less in terms of British pounds than in terms of U.S. dollars in recent months. Interestingly, gold was down over 6 percent in British pounds since July 2014, and was down over 12 percent in dollar terms during the same period.
The slide in gold came in reaction to a sharp strengthening of the U.S. dollar after the Bank of Japan shocked financial markets by expanding monetary stimulus, weakening the yen.
Many investors also turned bearish on gold in October and November, on skepticism that the weakness of the euro zone economy, and financial market volatility, would hinder job creation in the United States.
Also, expectations persisted that U.S. monetary authorities will eventually move to raise rates, potentially boosting the dollar further, as the world’s biggest economy recovers. In contrast, the pound hit a two-week low against the dollar on October 31 after data showed U.S. wages recovering.
The pound has struggled in the last quarter of 2014 after Bank of England policymakers suggested that UK interest rates would remain at historic lows for longer than had been thought, due to an uncertain and patchy economic recovery amid depressed wages for much of the workforce and weak commodity, notably oil prices.
Overall, gold prices were considerably less volatile in 2014, compared with 2013’s 28 percent slide following 12 years of gains. The main driver of bullion in 2014 was the strong dollar. Anticipated U.S. rate rises may support the dollar in 2015, dragging on gold price prospects. Dealers expect that a weak commodities complex, influenced by crude oil prices at near 5-1/2-year lows due to over-supply, would likely limit the upside potential of gold in 2015.
Some analysts forecast a drop in gold prices in 2015, possibly towards $1,000 an ounce, due to expectations for a strong dollar, weak oil and higher U.S. rates.
A focus of UK-based gold investors will be the pound, which risks a volatile period in the next few months due to uncertainty over the outcome of Britain’s general election expected in May 2015.
Weak commodity prices and low inflation in the UK have delayed an expected UK interest rate increase from the current historic low, potentially weighing on the pound against the dollar, with many analysts now seeing a UK rate rise towards the end of 2015.
The dollar has risen to its highest level in nearly five years against a basket of currencies, largely due to a lower euro, which hit a 4-1/2-year trough after the European Central Bank fanned expectations it would take bolder steps on monetary stimulus in January.
ABOUT THE AUTHOR
Jayant Raniga joined the family business Bhanji Gokaldas & Sons (PureJewels) in 2003 after a successful career in Risk Management for an Investment Bank.
Raniga says “I have grown up with gold in a jewellery workshop environment, when my grandfather, dad and uncles used to manufacture jewellery in East London, predominantly for the South Asian market, I used to be fascinated with all the craftsmanship and artisan work”.
“It’s an exciting journey to evolve the company that has a heritage in fine jewellery and gold that spans eight generations and three continents. The opportunity to build a luxury brand with Asian roots, without losing age old traditions and techniques, require patience and investment.” Raniga says. Entering the jewellery and gold industry has allowed Jayant to adopt operational techniques and disciplines from other fields and faculties, while experimenting with new ideas and innovation confidently. He writes a monthly blog about gold on www.finegoldclub.com and directs the brand development of PureJewels (www.PureJewels.com). He is a regular speaker on branding, gold, diamonds and gem markets at the International Jewellery shows in London and Birmingham.
Disclaimer: The value of your gold holdings and purchases are subject to change. Bhanji Gokaldas & Sons trading as PureJewels do not offer any advisory service regarding the future price of gold. PureJewels only facilitates client orders for fine gold bars and other gold products for immediate delivery or at the end of the agreement period, once the ordered bar amount has been achieved through the customer’s gold allocations with PureJewels. PureJewels do not take any liability for any customer’s losses if they had purchased or not purchased any gold product with the information provided by PureJewels.
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