NEW YORK (Scrap Register): As gold prices tumble towards intra-year lows, market focus has shifted to the cost curve. Barclays estimates marginal cash cost at $988 an ounce and the marginal all-in sustaining costs were $1285 an ounce.
On an all-in basis, 12% of production is under water. ETP outflows on Friday were the largest daily net redemption since April. Investor sentiment has shifted from lack of conviction to bearish as the macro environment has turned increasingly negative for gold.
Expectations of rising rates and a stronger dollar continue to pressure gold. However, gold is still likely to draw some support from the physical market during the seasonally strong period for consumption.
The September FOMC meeting conveyed the data dependency of monetary policy with the dovish Fed participants tilting toward an earlier start to the hiking cycle and a gradual pace of normalization – according to our rates strategists. The decision was mildly hawkish in their view (Data dependent, 19 September 2014).
Overall, the September FOMC decision was in line with Barclays' economists’ expectation, with the Fed saying that labour market resources remain significantly underused and that it expects “to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”
That said, Chair Yellen stated clearly that rates could go higher sooner if economic performance results in a faster convergence towards the committee’s objectives than currently expected. Front-end Treasury yields moved modestly higher and the dollar rallied on the outcome, while US equity markets held onto recent gains.
Despite the fact that the FOMC meeting was in line with Barclays economists’ expectations, overall, the news indeed proved price-negative for gold, a non-yield-bearing asset, as the gold market has priced in a faster rate hike than it did previously.
Barclays economists and securitisation strategists now expect the ECB to extend its new asset purchase programme via adding central government bonds, likely by Q1 15 for two main reasons.
--Firstly, central government bonds will be needed to reach the ECB’s €1trn target, and secondly, they believe that the risk of too long a period of low inflation is higher than the ECB’s projections would imply, and that growth has deteriorated significantly. That said, central government bond purchases remain a close call – and there are a number of factors that could prevent this (QE on sovereign bonds Barclays new baseline, 19 September 2014). Indirectly, this could expose gold to additional potential downside through a lower EUR/USD.
On Friday, gold dropped to the lowest level since the beginning of the year. While US initial jobless claims fell to their lowest level in years in the latest data, the combination of additional dollar strength, as well as the market pricing in faster rate hike expectations, has exposed gold to the downside.
Furthermore, in Barclays' view, a recurring safe-haven bid thus far this year has kept gold prices sheltered from what otherwise would have been more significant downwards pressure. However, prices are now shifting their focus away from gold’s safe-haven appeal towards the macro environment, which is becoming increasingly bearish for gold, in Barclays view.
