Gold market dynamics explained

Since the beginning of the last financial crisis, five forces have been driving the price of gold. Most notable has been the emergence of Chinese consumer demand which prior to 2009 was negligible. For the past five years, the country has been the largest consumer and producer of the metal. Physically backed gold ETFs have also emerged as an important player in the market . The ability to rapidly shift from being a source of strong demand into a source of supply has changed the dynamic in the supply-demand balance . Central banks which prior to 2009 were a large source of supply in the market have turned into a source of demand. That said, as several banks reached their target holding of gold many have turned to dynamic hedging. Net additions have mainly come from gold producing emerging countries Indian demand for the metal, which before the development of the Chinese gold market had been th e largest consumer of the metal , has been relatively weak. Much of this can be attributed to import duties on gold and a weaker local currency. Finally, developments in the US, from QE to tapering, have had the largest impact on gold prices. Wit h regards to supply, we expect mined output to drop this year and during 2019-20 (at least) . This is because of the cuts in long term capex that took place following the 2013 collapse in gold prices . We are moderately bullish on gold prices for 2019 , with prices averaging $1,275 /oz then rising to an average of $1,300/oz in 2020 . G old prices should receive support from a weaker dollar and as the cycle of US rate hikes comes to an end