Gold prices will swing up in 2013 before diving in 2014

Fall in gold prices still a year away, says OCBC.

Gold should continue to appreciate in 2013 despite recent developments that have dragged prices down.

Here's the full forecast analysis from OCBC:

Initial euphoria from the aversion of a fiscal cliff died with the surprising hawkish tone from the FOMC minutes. With discussions to possibly end $85bn of monthly purchases before the year is up, gold prices tanked to its $1,650/oz handle while the USD strengthened to its three-week high. The recent move clearly showed that the key driver for gold prices is due to liquidity injections (or the lack thereof).

Despite the announcement, we believe that the decline in gold prices is but a knee-jerk reaction as some key variables are still left unanswered: (1) the prospect of the Eurozone debt crisis and its spillover effects on the global economy, (2) the resilience of the Chinese manufacturing recovery story, and (3) the comparatively high US unemployment rate of 7.7%. As such, the affordability of the dearth of QE3 for the US economy and labor market is still very much in question. 

Nothing is carved in stone… yet. We note that the possible cessation of QE3 in 2013 is only but a mere discussion, and gold prices would still be very much dependent on further data releases, especially tonight’s nonfarm payrolls (a +180k to 200k reading may further induce dollar strength and depress gold prices) and the upcoming FOMC meeting on 31 January. As to whether the Fed would douse its QE3 efforts this year, we note that the Fed’s rhetoric during its December FOMC announcement leans towards its preference for low interest rates until unemployment falls below 6.5% with inflation sitting below 2.5%. It also adds that QE3 would be continued until there was a “substantial improvement in the labor market”. The current unemployment rate (7.7%) and personal consumption expenditure inflation (1.4%) remains favorable towards a continuation of the Fed’s QE3 efforts. Furthermore, the promise to keep interest rate low till 2015 sits well with the latest FOMC key economic forecasts, where unemployment rate is expected to fall below 6.5% only in 2015. 

Accounting for the comparatively high unemployment rate and low inflation figures, coupled with the mentioned unanswered key variables, we opine that the most likely timing for the dearth of QE3 (should it occur) would be at end 2013. With this scenario, the fall in gold prices should only be concerned in 2014, rather than this year, thus allowing gold prices to sustain its coveted upward appreciation trend for the year. 

Meanwhile, do note that India, the world’s largest bullion buyer, is considering raising taxes on gold imports in a hope to curb demand and improve its current account standing. India had previously doubled the tax on purchase of gold bars and coins in March last year, which contributed to a negative growth in gold imports in 2H12. As such, a fresh round of tax increases should effectively reduce further gold demand and limit gold gains. Additionally, the US fiscal issue may return to haunt the markets after two months, as the recent agreement merely postponed the steep spending cuts. The anticipated re-emergence of the fiscal cliff concerns should also depress risk-related commodities especially crude oil and base metals.

Barring an early cessation of liquidity injections in 2013, we remain confident that gold prices have appreciation potential. However, with the recent price correction and possible range-trading in 1Q13,  we revise our gold forecast down from $1,950/oz to $1,850/oz at year-end.