Can Gold Price Extend Its Downside Through 2016? Some More Title for QA Test ……

Gold, which hit an annual high of $1308 during January, is all set to register near 10% decline and join the year 2013 and 2014 by being on the negative side for third consecutive year. The yellow metal prices which started the year 2015 on the hopes of reversing prior two years’ decline were largely dragged down due to the expectations of an interest rate hike by the US Federal Reserve (which was finally delivered in December). However, what concerns the market players is the trend of the bullion during the year 2016. Will the precious metal continue extending its downside for the fourth straight year or it will revive to gain back the previously lost grounds? Let’s discuss some details which can help forecast the forthcoming Gold moves. US SPX

Qualitative Reasons:

The year 2015 started with the political tensions in Europe and a problem between Russia and Ukraine; moreover, optimism surrounding India, the world’s largest bullion consumer, also caused many analysts to forecast a rise in Gold demand. Though, nothing lasted long as the fears of Greece exit (popularly termed as ‘Grexit’) evaporated after the new government bend to the troika’s demand and the conflict between Russia and Ukraine got off from the headlines while the Indian government struggled to fuel the economy and China, world’s second largest gold consumer, added one more reason to be worried about the Gold prices.

While factors favoring the gold prices advance slowly became inactive, speculations concerning the first in a decade interest rate hike by the US Federal Reserve provided considerable weakness to the yellow metal. The US Federal Reserve, which announced its first rate lift-off decision on December 16, eventually fueled the US Dollar strength, which is about to register 8.0% growth on annual basis if counted via US Dollar Index (I.USDX). The Gold, which in-turn trades negatively with the USD trend, has thus registered a third annual downside majorly due to greenback strength.

Moving forward, the US Federal Reserve is expected announce another 1.00% quantum of rate hikes during the year 2016, in addition to recently disclosed 0.25% lift-off. Should the US economics, which are upbeat off-late, help the central banks introduce the forecasted results, the USD is likely to register additional strength, which in-turn could provide further weakness to the yellow metal. Moreover, pessimism surrounding emerging market economies, including India and China, which are the bullion’s largest consumers, may indicate weaker demand from these economies and provide additional reason for the precious metal’s downside during 2016.

Demand Statistics:

Looking at the recent demand, global gold demand grew 8.0% during Q3 2015 to 1121 tons while the central bankers’ buying remained near to the levels marked in Q3 2014 (179 tons) by being at 175 tons, posting the second highest quarter of net purchases on record. Further, investment demand for the yellow metal, including bars, coins and ETF demand, registered 27.0% y-o-y gain during the third quarter of 2015; though, decline in the ETF demand remained as a concern of worry as assets of SPDR Gold Trust, the top gold-backed exchange-traded fund, were near seven years’ low around 1466 metric tons during late-December, and the short positions for gold in COMEX are around all-time high.

Moreover, recently published import numbers from India and China, contributing major portion of global gold demand, signals that Chinese imports via Hong-Kong declined to 66.8 tons from 68.2 tons in October and 87.2 tons a year earlier while the dragon nation imported 16.5 tons in November from Switzerland as compared to 29 tons registered during October. Moving on, Indian imports have already totaled to 850 tons during January-September of 2015 as against 650 tons in the first 9 months of last year while the same import numbers are likely to rise by additional 150-200 tons during the Q4 2015 and may result 1000 tons mark for the full year 2015 as compared to 900 tons registered in 2014.

Contrast to the qualitative factors that helped extending Gold downside, the demand numbers are showing signs of improvement off-late; however, unless the annual numbers prints upbeat marks, it isn’t a fruitful point to convey that the recent increase in gold demand may counter the three years’ price downside.

Technical Analysis:

Even if the two years old descending trend-channel favors further downside of the yellow metal, a bounce from the channel support, also including 61.8% FE of its January – July 2015 decline, near $1050-45, can propel the metal to $1100 mark immediate resistance. Should it extend the short-covering recovery beyond $1100, 61.8% Fibonacci Retracement of its October 2008 to September 2011 rally, near $1150-55, and the $1200 are likely consecutive resistances that the bullion prices may face. However, channel resistance, near $1275-80 presently, could limit the precious metal’s further advance, failing to which it could progress in its northward trajectory to $1440-50 resistance-zone, with $1300 (comprising 50% Fibo) being an intermediate resistance.

Alternatively, a break of $1050 can quickly drag the metal prices towards $1000 – $995 area prior to targeting the $900 round figure mark. Should it continue the south-run below $900, the $850 and the $780 are consecutive supports that the prices could witness during further downside.

Conclusion:

Improvement in US economics strengthens chances of gradual rate hikes by the US Fed, which was the major reason for the 2015 downside of Gold. Though, recent recovery in demand statistics can limit further south-run of the yellow metal. Moreover, the technical pattern is also favoring steady decline in yellow metal prices. Hence, it becomes safe to say that the Gold prices could continue extending its south-run during 2016 in a gradual manner.

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Anil Panchal
Market Analyst
Admiral Markets

New Title to Test TOC

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