A week in gold: Analysts differ on the metal's future

(MENAFN- ProactiveInvestors)Analyst opinion has been split on how the gold price will react when the US raises interest rates. Not that the Federal Open Market Committee (FOMC) is making life easy – its latest minutes provide little clue on when the trigger might be pulled. Having been dragged lower for most of the year by a strengthening dollar and rising US bond yields the price of the yellow metal has nudged higher over the past few weeks. The reasons for the turnaround according to Simona Gamborini at Capital Economics is 'safe-haven demand and expectations that the Fed will delay the first rate hike'. She reckons the Fed will move in September taking some of the sheen off the metal but still remains bullish on the longer term price of gold. 'We believe that temporary factors played a big role in weakening gold demand in the second quarter and expect the remainder of the year to be more positive' she said. Firstly the analyst reckons mine supply should level out with total output decreasing 3% in the first half of the year compared to the same period in 2014. 'Squeezed producer margins and cuts to capital expenditure might prompt mine output to plateau soon and eventually fall' Gamborini added. With several mines now operating at a loss output cuts could follow leading to an even tighter market. The investment bank ABN AMRO believes Gamborini's analysis overlooks one very important factor – oil prices. 'Mining precious metals is very energy intensive. The substantial drop in oil prices will push total cash costs to mine precious metals lower' ABN explained. Capital Economics' Gamborini thinks the price of gold will be supported by an uptick in jewellery demand which was some 10% lower year-on-year in the second quarter of 2015 should also boost the metal's price. India's jewellery demand slumped some 20% in the second quarter as rural incomes dropped and there were fewer 'auspicious days' for marriages. As a result Capital Economics has set its gold price forecast for the end of the year at US$1200 per ounce. ABN AMRO by contrast is predicting a drop to US$1000. 'The recent developments have not altered our outlook for precious metal prices' it said. 'With financial markets now attaching a lower probability to a Fed rate hike in September the market impact will be more substantial if the Fed decides to hike.' Once the shackles are off the cost of borrowing will continue to rise ABN reckons. This will boost the dollar and simultaneously hit the value of the precious metal. Gold was trading US$4 higher at US$1157 per ounce as the US markets opened on Friday.