Over the last month, we've seen very range-bound trading for the gold market. Meanwhile, silver prices slid back below $19/oz after peaking around $21/oz in early August. For some observers, this is the correction they have been waiting for in the gold market.
The most recent analysis by Allocated Bullion Solutions, a research firm that focuses on the gold market, suggests that the odds of a correction in gold has risen as we move past the summer months.
They describe this year's rally in gold as "mature," and perhaps losing some steam. Traders who have been long gold all year may be succumbing to fatigue as the bears gain some momentum. Anytime a market has traded in one direction for consecutive quarters, there is usually a bit of a reversal in store as speculators and hedgers balance things out. What remains to be seen is whether or not this development is temporary or if it portends a longer-term trend for gold prices.
Support for Gold Demand
Nonetheless, the analysts at ABS continue to believe that the downside risks for gold are only a near-term concern. Although gold has been range-bound during the slow summer trading months, the old adage to "never short a dull market" may apply here. ABS is targeting $1,500/oz for the gold price by the middle of 2017. They did revise this target lower, however, in response to what it sees as a short-term dynamic between traders rather than fundamental drivers for gold. It still sees investment demand from the West as the key to forecasting where gold prices are moving. From a technical perspective, it's a bullish sign that the gold price is still currently trading above its 100-day moving average (100-DMA) and its 200-DMA.
Gold demand has been shifting from jewelry demand to investment demand. This is often associated with poor economic performance; when the economy is booming, people spend more money on jewelry and other luxuries. The World Gold Council (WGC) points out that this was one of the major themes during the first half of the year: investment demand for gold outpaced all other sources of demand. Not only did this happen in consecutive quarters (Q1 2016 and Q2 2016) for the first time ever, but investment demand for gold during H1 was by far the highest ever on record, 16% higher than the first half of 2009 when the financial crisis was fresh in everyone's minds.
From an international perspective, another major boost for the gold market could come from the East during the fourth quarter. Healthy monsoon weather patterns in India this summer should promise a bountiful harvest for farmers in time for wedding season, which means copious purchases of gold as gifts and adornments for Indian wedding ceremonies. Interestingly, the wedding season dovetails with the beginning of the Chinese New Year, which is also an event that is traditionally celebrated with gifts of gold.
The slight overlap of these two periods of elevated gold demand should be a boon for global gold purchases during H2. Typically, China and India are the two leading countries in the world in terms of gold imports, though this flow of gold bullion to the East has slowed in 2016. According to ABS, even though higher gold prices have dampened gold buying in India earlier this year, the use of gold in weddings is more of a cultural "necessity" and won't be subject to as much price sensitivity.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.