US Fed policy will impact gold prices in 2014, say analysts, but uncertainty reigns...
GOLD PRICES in 2014 will be set by possible "tapering" of quantitative easing bond purchases by the US Federal Reserve, as well as expectations on its interest rate policy, according to analysts.
"We see little prospect of any tapering announcement [in 2013]," says Citigroup analyst Edward L.Morse in the bank's 2014 Annual Market Outlook for Commodities.
"March will be the earliest possible date for a possible tapering announcement," he concludes. Because January 2014 will then revive the debt ceiling debate in Congress, and new Fed chair Janet Yellen will then take charge in February.
Even with interest rates still set at zero, however, "fevered tapering speculation will push gold prices towards $1200 per ounce" as March approaches reckons Citi. But strong gold demand from China will then provide "support".
"After taper starts and ends," agrees TD Securities analyst Bart Melek in Toronto, "prices are likely to be driven more by fabrication demand and physical gold investment
, with speculative interest maintaining less of a role."
But looking further ahead to US interest rate policy, he says that "Speculative expectations of what real interest rates are likely to be in the future are the key initial trigger and driver of gold prices."
Real interest rates are the level of annual yield paid to savers and investors over and above the pace of inflation. The connection between gold prices and real rates
has long been a key feature of investment analysis.
Looking at 2014 gold prices, "the market's inability to project real [US] interest rates into the future with a great level of certainty makes this market subject to abrupt sentiment changes," says Melek.
More than half of the economists surveyed see rates rising sometime in 2015. Almost one-in-fifteen, however, sees a delay until 2017.
Gold prices peaked in 2011 as real interest rates on 10-year US Treasury bonds hit 30-year lows. Real rates have since risen, and gold prices fallen.