Thursday, September 11, 2014

Barclays: gold under downside risk

by Scrap Register

NEW YORK (Scrap Register): Dollar strength continues to burden gold as prices slipped to almost three-month lows. Stronger-than-expected US macro data have exposed gold’s lack of support from the physical market, as well as investors’ lack of conviction.

In Barclays' view, gold continues to look vulnerable. Palladium , meanwhile, has held up relatively well, and recent data, notably US car sales, continues to underline its strong fundamentals.

Precious metals prices suffered a sharp correction at the start of the week, as stronger-than expected US macro data, coupled with a strengthening dollar, weighed upon prices, sending gold towards $1260/oz and silver slipping below $19/oz – levels last seen in mid-June. Platinum dipped below $1400/oz, a level last seen in April, while palladium remained the most resilient, testing only two-week lows.

Gold has been at the mercy of the macro environment this week with news from both sides of the pond lending gold little favour. Macro data from the US have been better than expected, increasing market speculation of earlier rate hikes.

While in Europe, the ECB rate cut and ABS purchase programme to be launched in October have driven the euro to weaken further against the dollar. The EUR/USD is now trading at levels last seen in July 2013 on the back of the ECB announcement and expectations for a Fed rate hike next year. The strength of the dollar has weighed upon gold, but prices have held up relatively well, considering the magnitude of the move in the currency.

The correlation between gold and the EUR/USD has fallen to close to 10%. Thus, although a negative for gold, the geopolitical backdrop has meant that gold has not suffered to the extent that its vulnerable floor suggests.

In Barclays' view, this means that gold is still exposed to further downside risk, particularly in light of the limited physical appetite for the metal. September usually marks the start of rising demand ahead of the festival- and wedding-related buying in India.

While Barclays does expect an uptick in consumption, given the weaker-than-usual monsoon, Barclays expects the overall appetite to be softer than normal whilst the smuggling of gold remains ripe. Turkey’s latest trade data for August showed that shipments remained subdued in August, at 2 tons, while Ramadan weighed upon appetite in July, buying has not picked up significantly thereafter.

Separately, ETP holdings for gold have continued to shrink with preliminary data for August revealing an outflow of 11 tons and flows in September have started the month off on a negative note at 9 tons.

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