Tuesday, September 16, 2014

Barclays: gold at downside risks from negative macro front

by Scrap Register

NEW YORK (Scrap Register): The macro backdrop looked set to become increasingly negative for gold , particularly in light of the strength of the dollar and US 10y Treasuries rising to six-week highs.

Although both relationships are headwinds for gold, Barclays expects the correlation with the EUR/USD to strengthen as geopolitical tensions ease. Barclays recent downgrade of EUR/USD poses increasing downside risks that will trump any modest seasonal improvement in physical demand.

As Barclays highlighted previously, given the magnitude of the decline in the EUR/USD, they would have expected gold to be subject to further downside risk. Although gold has suffered additional downside risk in recent sessions, prices are likely to bear a greater burden given the easing of geopolitical tensions.

Gold had caught a safe-haven bid that limited the downside, but with tension easing in Ukraine, gold is set to lose its upward pull. Currently, gold’s correlation with US 10y Treasuries is stronger (three-month rolling correlation: -33%) than its correlation with the USD (three-month rolling correlation: 18%).

Although both relationships are set to be negative for gold, Barclays expects the correlation with the EUR/USD to strengthen as geopolitical tensions ease.

Physical demand has scope to limit the downside risk for gold, and there are signs that demand has picked up in September ahead of wedding- and festival-related buying in India. But given the decline in prices, demand has not responded aggressively, suggesting an unusually soft price floor. This deflated cushion has been exacerbated by the weaker-than normal monsoon, as well as by comments this week by India’s trade minister, who was quoted as saying that the country had no plans to reduce the import duty despite a lower current account deficit (Reuters).

Barclays economists note excessive rainfall in north India resulted in flooding over the past week and has improved the rainfall shortfall to 11% from 14%; however, a shortfall still exists. In Barclays’ view, the strengthening dollar is set to outweigh any modest improvement in physical demand.

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