Commodity Watch 25/11/2014 – Gold

Gold's past few months have been less than rosy, following the trend of a very erratic, and disappointing, two years for the metal.

This culminated in the ominous news in early November that the commodity was hovering just above lows not seen since 2010, at around $1143. This is a dramatic drop when compared to the highs of $1900 seen only 2 and a half years ago, and gold's fall from grace has shown no real signs of stalling since its steep decline in 2013. Despite this, gold was looking relatively perky at the start of 2014, reaching the $1380s in March, recovering from a shaky January where it dropped to $1200.

However this springtime recovery didn’t last long and gold's choppy waters turned into a steady decline, with the metal trading at $1190 per ounce by October. An anomalous jump at the end of October suggested gold's fortunes were about to turn around. Instead, gold found itself at 4 year lows related to events in Japan and America.

The Bank of Japan's decision to massively extend quantitative easing caused the US dollar to fly to 5 year highs, providing no incentive to use gold as an alternative investment. The BoJ's move could not have come at a worse time for gold, as the commodity was already struggling against a stronger dollar following the US Federal Reserve ending their quantitative easing program. Alongside a consistent string of positive US data since this dual boost to the dollar and the Dow, both these markets have seen their strongest performance in years. The US is dominating the forex and indices alike, suffocating gold’s appeal as a viable investment.

Since the darkest days of this dollar-prompted-low, gold has rallied slightly to reach marginally above the $1200 mark, in part helped by China’s surprising decision last week to slash interest rates in order to jump-start its flagging economy. China’s position as the world’s second largest economy means that its weakness helped, slightly, to compensate for the USA’s strength in relation to gold, resulting in the aforementioned crossing of the $1200 line.

However, a bout of flatness has begun to creep into the yellow metal, as it waits for a big decision in Switzerland. The boost provided by China could be matched as Switzerland go to the polls on November 30th to decide whether to increase, and prevent the sale of, gold reserves. A yes vote would see the Switzerland National Bank be required to hold 20% of its assets as gold, and repatriate the 30% of its gold currently held by the Bank of England and Bank of Canada.

A ‘yes’ vote would also be a vote in favour of the strength of gold, and could see gold rally by nearly $50, according to analysts at HSBC. However, support for the ‘yes’ vote has slipped to only 38%. If the ‘no’ vote prevailed there would be a knock on effect for the commodity; however, the destructive power of the ‘no’ vote would be less than the positive power of the ‘yes’ vote due to gold’s already diminished position.

Earlier in the year Goldman Sachs predicted gold with finish the year at $1050 an ounce. The accuracy of this prediction will largely be based on the continued strength of the US markets, more positive data coming out of America, and whether these combined factors will cause the US Federal Reserve to raise interest rates. If they do, another significant drop could be in store for gold. The metal will be pinning its short term hopes on the dual prospects of potentially more Chinese interest cuts and the (slim) chance that Switzerland will vote ‘yes’ to more gold.