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Strong dollar will threaten global gold market

Monday, February 23, 2015

Subject

Gold market outlook.

Significance

The gold price is up only 0.9% since the year started, despite Greece's negotiations with its creditors and resulting stronger demand for safe haven assets, as the dollar's strength and buoyant equity markets weigh on investor appetite for gold. For several years, gold benefited from expectations of negative real interest rates, but the end of the Federal Reserve (Fed)'s quantitative easing programme has eliminated the main macroeconomic argument for investors with dollar-denominated wealth. While there is evidence of the physical metal migrating to Asia, the process has been accompanied by an even stronger demand for dollar assets, undermining any gold price gains.

Impacts

  • The London Bullion Market Association has selected ICE benchmark to administer price-setting, which will be based on electronic auctions.
  • China will provide foreign investors with direct access to its gold market.
  • Holders of distressed mining assets will fall prey to companies with easier access to financing, reducing the industry's fragmentation.
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