Gold bounces back after hitting key support level of $1,145/oz

It is expected to remain subdued until first interest rate hike, which is expected by mid-2015

Gold bounced back after hitting the crucial support level of $1,145 to trade marginally higher than the lowest level of the estimated production cost. The bullion is currently trading at $1,159 an oz in the London spot market.

This was the second time in the last four months, when gold breached the lower curve of the production cost range of $1,150-1,250 an oz and rebounded. On November 5, gold had touched $1,145 for a while and bounced back thereafter. Gold has been moving between $1,145 and $1,290 for the last few months.

“Most miners have started saving of costs. Sustaining the current level would force miners to cut production,” said Jayant Manglik, president (retail distribution), Religare Securities Ltd.

Gold is likely to remain subdued in the first half of the calendar year 2015 on expectations of the United Federal Reserves’ (Fed) hawkish stance on interest rate hikes. Strengthening US dollar has supported investors’ sentiment to pull out investment from the yellow metal and park their funds in alternative avenues, including equities and dollar-related asset classes.

“Till the first interest rate hike is announced by the US Federal Reserves, gold will remain subdued. Thereafter, the market would study about possibility of further hikes to determine next move,” said Gnanasekar Thiagarajan, director, Commtrendz Research.

A bullion analysis report by the London Bullion Markets Association (LBMA), forecasts gold price to trade between $1,085 and $1,356 an oz to average at $1,211 an oz in 2015, a decline from $1,267 an oz in 2,014.

Quoting Robin Bhar, a noted bullion analyst of Société Générale (SG), the report said, “The multi-year gold downtrend should accelerate during 2015 once the Fed adopts a more hawkish tone and the market starts pricing in a faster pace of rate hikes. The first rate hike is expected by mid-2015, with 75 bp of tightening by end-2015 and a further 150 bp during 2016.”

Factoring interest rate hikes resulting into likely pick-up in wage inflation caused by a further tightening of the labour market, SG lowed 2015 gold forecast to $1,000 before the end of 2015. With better alternatives being more profitable than gold, investment demand is expected to wane going forward.