The backdrop for precious metals in general, and gold in particular, has deteriorated
Central banks have stopped accumulating gold
According to IMF data, holdings of gold by Central Banks have been peaking. The post financial crisis appetite for bullion is receding as several central banks have already reached their target breakdown of foreign exchange reserves. This picture was highlighted on Monday 20 when the PBoC report of gold holdings at 1,658 tons (dramatically lower than consensus estimates of 3,500 tons) coincided with a flash crash of the precious metal market down to its lowest level since February 2010.
Asian demand is fading
Trends on Chinese gold imports are weakening, impaired the ongoing crackdown on corruption (which makes vast use of the metal as means of transactions). Indian authorities on their end have lately been adjusting tariffs on gold in order to curb imports, a major source of current account deficit (gold is the second import in value for India after petroleum).
Risk-on environment and Fed normalization
Last but not least, we think that gold is losing investment attractiveness as the macro backdrop is exiting its post-crisis deflationary mode: global growth is gradually recovering; the economic dynamics in the Eurozone and Japan seem to be improving; and the Fed will probably hike funding rates next September. This latter move could support some appreciation of the greenback, typically costly for the precious metal.
UNDERWEIGHT STANCE ON GOLD
We believe that gold prices are highly vulnerable to the risk-on window and the coming Fed’s policy normalization, with potential USD appreciation and rising bond yields. We also think on the other hand that the current environment of perfectly benign – although grinding higher – inflation is still no support to gold as a refuge against inflationary threats.
We downgraded last month our long term view on gold from neutral to underweight and we emphasize this stance today.
Lyxor Cross Asset Research