Despite a strong start to 2014, gold prices are likely to consolidate lower due to longer-term investors' price sensitivity and shorter-term investors' concerns about US Federal Reserve monetary policy, analysts from the New York-based research firm CPM Group said Tuesday.
"CPM Group does not expect gold prices to decline significantly from current levels, but neither does it expect a sharp increase in prices over 2014 and 2015," analysts said in the group's Gold Yearbook 2014, which was released Tuesday.
In 2014, gold prices are expected to average $1,256.77/oz, down 10.8% from the $1,409.52/oz last year, CPM analysts said in the report.
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The sharp rally in gold prices in January and early February has made some longer-term investors wary of more purchases, the analysts said, adding: "This price sensitivity could weigh on prices as the year progresses and limit any recovery."
Meanwhile, shorter-term investors appear focused on the narrowing of the Fed's monetary accommodation policy and its consequences for interest rates, analysts said.
Net private investment in gold is expected to decline 30.6% year on year to 21.4 million oz in 2014, while jewelry demand is expected to rise 5.4% compared with 2013 to 82.8 million oz, CPM analysts said.
Central bank transactions are expected to total 5.4 million oz in 2014, up 866% from the 600,000 oz last year, the lowest net addition since 2008, analysts said.
In 2013, CPM analysts noted that gold prices were in a declining trend for 11 out of 12 months, with the biggest slide in COMEX prices seen in April as excess inventory built up ahead of the Lunar New Year in Asia hit the market, CPM analysts said.
Adding to the excess inventory and weak demand were a series of weak economic numbers from China and the US in early April that suggested global hyperinflation was unlikely. Gold is often bought as a hedge against inflation.
"Investors that were long gold based on the expectation that the global economy and financial markets would collapse were already beginning to get concerned about their long positions," CPM analysts said. "Following the sharp decline in gold prices on Friday, 12 April, some of these longs were seen liquidating their positions on Monday, 15 April."
The market recovered in the second half of April on bargain hunting by longer-term investors. But short-term investors used the recovery as a selling opportunity in May, thereby dissuading longer-term inventors and central banks from making fresh purchases, CPM analysts said.
Gold investment demand declined 6.7 million oz year on year in 2013 to 30.9 million oz. "Selling by shorter-term investors was largely responsible for the weakness in net additions to investor demand during 2013," the CPM analysts said.
"Some of these investors were tired of waiting for gold prices to break past the record high levels reached in 2011, as promised by several gold market promoters, and decided to take their profits in the gold market and deploy them into the equity and real estate markets, which were providing healthy returns in 2013," they said.
Longer term investors, meanwhile, were largely responsible for the 30.9 million oz in net additions in 2013. This year, net additions to investment demand are expected to total about 21.4 million oz, the CPM analysts said.
"Investors always have been the key factor behind rising and falling gold prices, at least in modern times," analysts said. "Some investors buy gold based on its market fundamentals, but the vast majority of investment demand is determined by developments in the broader society, economy, and polity."
--Nick Jonson, firstname.lastname@example.org
--Edited by Keiron Greenhalgh, email@example.com