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Interview de Robin Bhar : Head of Metals Research, Societe Generale Corporate & Investment Banking

Robin Bhar

Head of Metals Research, Societe Generale Corporate & Investment Banking

Gold price could be 900 dollars in 2016 and 800 dollars in 2017

Publié le 04 Août 2015

What do you think about the recently rout that's sent gold to a five-year low? Are you surprised? Do you think Gold is navigating in very dangerous waters?
We were surprised by the heavy sell off that happened early on the morning of Monday 20th of July on the Shanghai market. Nobody could forecast that level of sell off however we are not surprised to see gold trading at a lower level. We have been expecting a decline for three years in the gold price for a number of reasons.
Investors see less interest to hold gold. Reasons that drove gold to 1900 dollars in 2011 disappeared or are going to disappear in the coming months. One of the major reason is that the Fed will begin to raise interest rates. We think the change US monetary policy that will be the key driver for the gold market.

Do you expect that the bearish view on the gold market will go on ?

Absolutely, yes.

What is today your central scenario for the Fed ?

Our economists expect the Fed will start raising rates later this year. The most likely month is September. If nothing is decided in September, an action could be observed in December.
In 2016, we are looking at further increases. The Fed may increase rates a little bit more every quarter in 2016. The total increase could represent 1% for all of next year because the economy in the US is getting stronger, and is creating more jobs. As a consequence the unemployment rate is falling. There are early signs that show that inflation is beginning to increase again.

What about China and Greece in the explanation of gold price decrease?

The anticipation that the Fed will raise its rate is integrated in the market for many months. China and Greece are two factors that are new drivers in the gold movement these last weeks.

The resolution of the Greek debt problem and speaking about a third bailout removed some fears in the market that the country could leave the euro zone. There was a consensus that an agreement will be reached. The gold price didn’t rise even when the referendum with a “no” vote was announced. Fears about a Grexit were not sufficient to push the gold price higher.

The news of China’s central Bank regarding the level of the country’s gold reserves has been analyzed by some people as another bearish factor for gold price. The market thought that the central Bank was buying significantly more than the amount announced. China was usually a great buyer of physical gold in the jewelry segment, for investment, or for backing the currency.

About $US2.7 billion was erased from the value of exchange-traded products tracking precious metals early July, the most since March. Money managers are holding a short position on gold for the first time the US government data begun in 2006. Could you comment on this ?
It is all about timing. The selling off the ETF gold is not a recent movement. Since price gold reached its peak in 2011, we saw steady outflows in ETF gold. Gold is no longer giving yield. Investors prefer the equity market or the bond market to have better yield.
ETF liquidations accelerated in the last few weeks, especially since the beginning of July.

Moreover, in the futures market, like the Comex, for many months there was quite a large net long position. Investors were buying futures expecting that the price would rally with the problems linked to Greece, India and China demand. That didn’t happen. So now, we saw extremely heavy selling on the Comex platform and on the Shanghai gold exchange in hours were liquidity in the market is not the best.

You predict gold will reach 1000 dollars an ounce by December, which means another drop of 10% from current level? Do you confirm your prediction?

We expect the gold price will reach at least 1000 dollars and maybe lower by the end of 2015. The price could continue to fall in 2016 and 2017. Gold price could be 900 dollars in 2016 and 800 dollars in 2017 because we anticipate more interest rate increases and more strength in dollar value. These two factors will keep pressures on the gold price.
Our view is similar to some others participants in the market like Goldman Sachs.

What is the probability that your predications are correct?

It is a very difficult question. There may be a probability of around 70%.

To your mind, what this movement will imply for mining stocks? AngloGold Ashanti sank to a record low in Johannesburg, while Canada's Barrick Gold, the world's largest producer of the metal, dropped to the lowest since 1990. Could we see other declines like these?

Given our bearish view, we think there will be negative impact on the gold mining companies, especially companies that have a high production cost. We have to be prepared to see other great stocks falling if our forecast is accurate. Revenues and profit margins of these companies will diminish considerably.

Imen Hazgui