FxWirePro: Demand/supply equation of gold, price projections and investment flows

Gold prices are inching higher towards $1,287 ahead of a significant change of guard in the Federal Reserve this week and establishing the stage for the December meeting extensively anticipated to hike rates.

While the US 10yr treasury yields rose from 2.32% to 2.35%, 2yr yields from 1.73% to 1.75%. Fed fund futures yields continued to price the chance of a December rate hike at 100%.

Demand/Supply: It is expected that the mine production to drop soberly from 3,225t in 2017 to 3,150t in 2018, scrap supply is expected to increase from 1,256t to 1,357t between 2017 and 2018. After accounting for modest producer hedging, we expect total supply to remain flat. While costs of production have risen moderately in 2017, we do not expect them to trend much higher as we see less pressure from energy costs (we are bearish oil) despite lower ore grades in South Africa. Consequently, we do not believe costs are a factor in providing any bullish support as margins should remain very healthy.

Total demand, other than ETF buying, is expected to decline in 2018 from 3,504t to 3,453t. Demand declines are forecasted in jewelry and coin sectors, while industrial demand and bar hoarding are expected to rise moderately. From a demand perspective only, this is bearish on gold prices. ETF flows should dominate any change in demand, however. We forecast a surplus of gold in 2018.

Investment flows: This is the most important factor in determining prices over 2018. ETF flows rose approximately 12t in 3Q and we estimate that total ETF holding is 2,154t. ETF inflows lacked a clear catalyst in 3Q, despite some uplift from the increasing verbal tensions between North Korea and the US in August and September (offsetting outflows in July). Going forward, geopolitical flare-ups, of economic uncertainty can add support, but, as we are expecting a 25bp hike this December and three more 25bp hikes in 2018, ETF flows will face significant headwinds. This is the crux of our bearish outlook.

The price forecasts of gold for next 6m is at $1,225/oz. This is bearish, as the 6m forward curve is at $1,295/oz. If our most extreme upside price risk prevails, we could see prices average $1,325/oz. If our most extreme downside risk prevails, we could see prices average $1,175/oz. Our 12m forecast for gold is $1,175/oz. This is a very bearish outlook, as the 12m forward curve is at $1,312/oz. We expect prices to fluctuate between $1,175/oz and $1,350/oz over the next 6–12 months. Courtesy: SG

Gold’s futures contracts for December delivery surged 0.11% to $1,288.70 a troy ounce on the Comex division of the NYME.