Photo by: Duane Daws
JOHANNESBURG (miningweekly.com) – Following a remarkable performance in the year to date, the gold price fell by over 3% on October 4, taking it below $1 300/oz for the first time since the outcome of the June referendum on Britain’s planned exit from the European Union, creating a good buying opportunity, as many consumers and investors have been waiting for a price pull-back before entering the market.
The drop in the gold price seems to have been driven by speculation of a scaling back in the European Central Bank’s €10-billion monthly asset purchase programme, combined with rising expectations of a US rate hike in December.
The move was exacerbated by technical levels, tactical positioning in derivatives markets and a national holiday in China.
“Looking forward, we believe the price dip will offer a good buying opportunity for consumers and long-term investors. In addition, even though central banks may start to normalise monetary policies, such a prolonged period of extraordinary measures has led to a structural shift in asset allocation that will linger much longer,” the World Gold Council (WGC) said in its October market update.
For the past three months, the gold price traded in a range of $1 310/oz to $1 370/oz.
“Once the gold price pushed below $1 310/oz, representing gold’s 100-day moving average, technical selling increased sharply, exacerbating the fall and triggering stop-losses and further tactical selling,” the WGC noted.
The top five countries where consumers were considering buying gold following the price drop were in the Middle East, with the United Arab Emirates in the top spot.
“Anecdotal evidence suggests that consumers had been holding off purchases in previous months, so this may well trigger an increase in demand. The price correction also comes at a good time for Indian consumers.
“With a good monsoon, the upcoming wedding season and the Diwali and Dhanteras festivals, demand could pick up after subdued activity year-to-date,” the WGC pointed out.
Volumes in the physically gold-backed exchange-traded funds picked up in the secondary market as the price fell, and they have not resulted in large redemptions so far. “We believe this is an indication that there is still good appetite for gold among the investment community,” the council said.
Central banks, a major driver of gold demand, continue to be strong buyers of the metal to diversify their reserve asset holdings considering the shrinking universe of non-negative yielding assets.
The Russian central bank recently said it had no specific target for its gold holdings and it continued to buy regularly every month.
Meanwhile, a recent survey of 19 central bank reserve managers, conducted by the WGC, shows that nearly 90% of them will either increase or maintain their current gold reserve levels, indicating a strong floor of support for gold demand.
“Market fluctuations will naturally occur from time to time, but the fundamental environment for gold remains strongly supportive. The broader market environment of ongoing low and negative interest rates, coupled with continuing political, economic and policy uncertainty remains unchanged, and is generally positive for gold,” the WGC said.