Gold: Prices are close to being oversold – Standard Chartered

Analysts at Standard Chartered explains that gold prices fell to their lowest levels since mid-March ahead of the French election but the Relative Strength Indicator (RSI) indicates prices are close to being oversold.

Key Quotes

“Gold prices fell to their lowest levels since mid-March ahead of the French election, and subdued one-month implied volatility suggested the gold market had not been pricing in a Marine Le Pen win. Following Emmanuel Macron’s victory, EUR-USD firmed but gold’s strongest correlation is with 10Y US Treasuries (USTs) in the current environment. Unsurprisingly, speculative positioning has fallen, with the largest weekly decline in positions since mid-March. Net fund length was driven lower last week, mainly on the back of long liquidation (11.4k lots) and the establishment of fresh short positions (5.4k lots). This is the first reduction in positioning in seven weeks. The Relative Strength Indicator (RSI) indicates prices are close to being oversold; this, coupled with a Macron victory potentially removing downside economic risk and supporting the EUR, means that gold prices should stabilise and edge higher. However, we maintain the view that should UST yields firm, gold is likely to trade towards USD 1,200/oz, given its strong correlation with USTs.”

“The Q1-2017 World Gold Council (WGC) Gold Demand Trends (GDT) report released last week reported that demand fell 18% y/y to 1,034.5 tonnes (t) while supply fell 12% y/y to 1,032t, resulting in a balanced market, compared with an oversupplied market in Q4-2016 (145.4t) and a deficit in Q1-2016 (of 85.6t).”

“The impact of demonetisation on India’s cash purchases and the slowdown of gold buying have been well documented. We believed Q1-2017 would be pivotal in determining how the local market adjusted to the raft of new measures. One of our key concerns for gold was the upper limit of cash purchases and withdrawals, and the need to document sales, as well as the impact on gold shipped through unofficial channels. India’s gold consumer demand was down almost 50% q/q in Q1-2017 but rose 15% y/y.”

“Softer prices in March added to pent-up demand, as well as providing a buying opportunity ahead of the gold-buying festival, Akshaya Tritiya; anecdotal evidence suggests sales were up 20-30% y/y. Gradual remonetisation has supported cash purchases, as evidenced by recovering motorcycle sales.”

“Central bank purchases were down 27% y/y and 30% q/q at 76.3t, the weakest quarter since Q2-2011. Russia remains a steady gold buyer, while China has been absent since October. We expect the official sector to continue to add to its reserves during the remainder of the year, but without another central bank to plug the gap left by China, buying is set to fall y/y. Mine output fell by 0.5% y/y and 10% q/q, and we forecast annual mine production growth of 0.2% y/y in 2017, assuming prices average USD 1,245/oz this year. Mine disruptions in Indonesia resulted in 8t of lost production in Q1.”