The Week In Hindsight, 20 June 2014
Gold was headed for yet another weekly gain on Friday afternoon as conflicts across the Middle East and eastern Europe escalated. Although escalating conflicts were the key driver behind gold prices into the weekend, it was comments from Janet Yellen at the FOMC press conference which set the basis for the metal’s gains.
In addition to reiterating the usual mantra that interest rates would remain low for a sustained period of time, Yellen also revised downward expectations for US growth this year. Given the unusually severe winter and a wide range of geopolitical risks, year end GDP is now expected to come in fractionally lower than initial forecasts Revised expectations see the US economy growing at pace that is somewhere between 2.1 – 2.3% vs previous expectations for growth of 2.9 – 3.0%.
Despite the downward trajectory of growth forecasts policy makers continue to believe that the US economic recovery remains in place, which was reflected in the FOMC decision to further reduce the rate of asset purchases. The total of Federal Reserve bond purchases now stands at $35 billion and is comprised of a $20 billion allocation to treasury securities and a $15 billion allocation to retail mortgage backed securities.
Going forward, we see no immediate solution to conflict in the Middle East or Eastern Europe and consequently, we expect a degree of support for gold at elevated levels going into the weeks ahead. Nevertheless, the medium to longer term outlook for the metal remains less than favourable. This is given the high level of purchases from both the multiple central banks over recent months (predominantly China and Russia) and the likelihood that this will eventually begin to slow.
In addition to the above, customs and excise data shows imports from Hong Kong to the Chinese mainland falling consistently over recent weeks. This is while the positive economic outlook for developed economies reinforces expectations for a gradual transition toward a rising rate environment in the west. As a result, the demand side of the equation for gold moving into the medium term suggests lower levels of interest from buyers and more than likely a resumption of the longer term downward trend.