Gold at 5-year low but cash buying from China seen restoring shine to yellow metal in 2016

PUBLISHED : Thursday, 03 December, 2015, 7:11pm
UPDATED : Thursday, 03 December, 2015, 9:47pm

A firmer dollar and strong hints from the US Federal Reserve chair that an interest rate rise is on the cards for this month has helped push gold prices to their lowest level in 5 years on Thursday as investors fled from the precious metal.

The price of spot gold fell to US$1,045.85 an ounce, the lowest since February 2010, before recovering to US$1,053.31 an ounce in late afternoon Asian trading.

Paying no income stream and looked down upon by some investment experts as a purely speculative play, the one-time fiat currency has fallen out of favour in recent years. Once seen as a safe haven in times of geopolitical turmoil, gold prices barely moved after the recent terrorist attacks in France and Lebanon, and the move by major Western European powers to bomb suspected ISIS strongholds in Syria.

Gold bugs retort that it still holds its safe-haven status, and prices would rise if there was major confrontation, like a war between Russia and Turkey.

Economist Oliver Jones at Capital Economics says the price of gold will go lower in the short term as the US dollar strengthens around the rate decision, but “may well recover soon as prices have fallen sharply...and we expect demand to rise in the run up to Chinese New Year (in February 2016).”

As one of the biggest buyers of physical gold alongside India, Chinese demand fell sharply in 2013, in part the result of President Xi Jinping’s anti-corruption campaign, while Indian demand was hit by a succession of poor monsoons, which weakened farmers’ spending power. That demand is now coming back, says Jones, who has a 2016 year-end spot price target of US$1,400 an ounce.

The key to bullion’s revival though will lie with the US dollar. As the US dollar strengthens gold becomes more expensive to buy in non-US dollar economies like China. That has historically meant prices could only go one way - down.

It was no coincidence that the metal topped out mid-2011 at around US$1,900 an ounce, coinciding with a period of US dollar weakness versus other major currencies.

Nor was gold the only metal to touch multi-year lows. Copper slipped close to a six year low in Shanghai while nickel dropped nearly 3 per cent. Silver also dropped to an August 2009 low while platinum fell back to levels not seen since late 2008 as metal prices continued to reel from a rout in the commodity complex.

In the current cycle gold will bottom out around the US$1,000 to US$1,020 an ounce range as there is “some good support around there” says Ronald Leung of Lee Cheong Gold Dealers.

Fed chair Janet Yellen on Wednesday expressed confidence in the US economic recovery and said she was “looking forward” to an interest rate rise. It would be the first rate rise since the financial crisis crippled the global economy and her comments helped propel the greenback to its highest level in more than a decade against a basket of major currencies.

“Normally when (American) interest rates go up the price of gold comes down,” said Gary Cheung, chief executive of Tung Shing Securities.