February 14th Weekly Gold Market Update
The gold price failed to recover last week but, as we predicted, it didn’t fall sharply as it did the week before. Instead we saw a drop to just below $1,220 by Wednesday followed by a climb back up to its closing price of $1,227.90. That’s a loss of $5.40, not a real worry. Overall it looks as if the spot price has hit a floor and we’re hoping to see it pick up again this week.
In fact gold did well to slip as little as it did, because the equities market had quite a good week. The Dow Jones index rose steadily through the period to gain almost 300 points, and across the Atlantic the FTSE 100 was also up, so we would have expected to see more of a drop in gold. Underlying demand seems to be healthy though, which is a very positive sign. Many analysts point to strong demand for gold jewelry as a possible driver for future gains; India, the leading market for decorative gold, registered record sales last year and while sales in China were down from 2013 the overall trend is up. Low prices fueled the surge in demand but continuing economic recovery has the potential to maintain sales in the face of a rising spot price. Low prices also reduced the amount of scrap gold entering the market and kept total supply fairly steady despite a 2 percent rise in mine output that brought it to a new record level last year. There aren’t likely to be any major production increases this year though, so with rising demand and static supply the pressure on prices will all be upwards.
One more factor that might help explain how gold managed to hold up is a slowdown in a competing commodity, oil. The crude oil price rose slowly last week, with WTI and Brent both gaining only a few cents. That’s not likely to be a long-term trend – Brent is likely to recover to above $60 a barrel – but it’s probably helping for now.
Larger financial trends are also going to help gold this year. Deflation is a risk that’s stubbornly refusing to go away, with the Federal Reserve’s efforts to reach their 2 percent inflation target still showing no signs of paying off. Deflation is likely to depress the stock markets as profits fall – 2014 could well go down as a record year for profits, and 2015 isn’t likely to come close – and that’s good for gold. With equities flagging investors are likely to search for an option that holds its value and gold, with no excess capacity, is a great bet. The derivatives market is looking particularly vulnerable just now, with the surprise decoupling of the Swiss Franc from the Euro highlighting just how shaky it potentially is, so a concrete asset is going to have a lot to recommend it to nervous investors. Some observers are predicting a new financial crisis in the not too distant future with gold likely to be one of the few survivors from a devastated financial system, so this is definitely a good time to be buying.
