The Week In Hindsight, 25 July 2014

Gold fell this week as better economic news (US & China) and the lack of any materially significant sanctions against Russia led investors to shrug off the escalating Ukraine crisis, driving the metal to break below the $1300 level before recovering late on Friday.  

In addition to the above, an increasingly darker outlook for emerging market demand also contributed to the metal’s decline throughout the week. This was as data released by the Census and Statistics Department of the Hong Kong highlighted a 23% reduction in imports from China during June, when compared with the month previous. Annual demand also fell but by a fractionally lesser proportion (-19%).

Although it is possible that some of this reduction can be accounted for by an unquantifiable amount of business now being routed through the Shanghai free trade zone (new) as opposed to the traditional Hong Kong > Mainland China channel.

Nevertheless, demand from the world’s second largest economy appears to have dwindled to some degree which, given the bearish medium term consensus among analysts, has proved negative for investor sentiment toward gold..

In addition to this the EU’s reluctance to support meaningful sanctions against Russia, even since the death of 298 Europeans, has more or less signalled to investors that radical measures are unlikely to be forthcoming. This we believe has led investor to once again shrug off events in Ukraine, further reducing demand.

Despite the week’s price action, we maintain our view that $1300 and below are levels which are likely to attract renewed interest from buyers, particularly for the length of time that persistent escalation of the crisis in Ukraine continues to drive western relations with Russia lower.