In Prospect: A strong 2015 For Gold And Silver?

Well there’s nothing like being optimistic at the start of a New Year and there are certainly many factors to be optimistic about if you are a gold bull. Gold demand remains strong – notably in China and India with those countries alone probably accounting for 100% or more of new mined gold at the moment.  At the end of this article we will make some not very scientific predictions on the final levels for the gold and silver prices at year end 2015 – perhaps to have these totally shot down in flames when the year- end comes. It is always easy to be wise after the event.

China (in the form of the Shanghai Gold Exchange) is looking to perhaps see full year demand fall around the 2,100 tonne plus mark, only a fraction below last year’s record of 2,181 tonnes. So much for the almost incessant mainstream media reports throughout 2014 of a collapse in the Chinese gold market!

India too has seen a remarkable pick-up in demand in the second half of 2014 despite the maintained imposition of 10% import duty on gold and silver – so much so that some commentators have reported that it may have become the world’s No. 1 gold consumer again, retaking this position from China. It hasn’t! But even so, if one takes smuggled gold into account to avoid the import restrictions, it could well have imported close to 1,000 tonnes in 2014 – maybe more – and with world newly mined gold output estimated as likely to be at perhaps just over 3,000 tonnes in 2014 then it definitely looks as though the two Asian giants will indeed have accounted for virtually all of this.

But of course China and India are not the only consumers of gold. Virtually every Asian and Middle Eastern nation has a propensity to accumulate gold, while there are also signs that the jewellery sector – the main non-investment gold consumption market – has also been picking up healthily in the U.S. in particular as the populace is fed a seemingly unending positive spin on a return to economic growth.

Geopolitical events are also impacting positively on safe haven demand for gold. The crisis in Ukraine and Crimea is still playing out and is likely to cause ever more strife moving forwards. Russia’s President Putin in his New Year address made it quite clear that Crimea is now again wholly part of Mother Russia, while Ukraine’s economic plight is dire and one finds it hard to see how it can continue without defaulting on its financial commitments. This could have a major adverse impact on creditor banks and nations, which in turn could have a knock-on effect on financial institutions globally. One can foresee runs on banks and domino bank and fund collapses as a result with the global financial system being so closely interlinked.

But Russia too has seen economic sanctions and low oil prices bite severely and it is also in somewhat of a financial imbroglio. But still it has been buying gold for its reserves which it sees as a stabilising influence. Russian banks are in financial trouble too as access to Western funds is cut off. What should worry the West is that Russia has the capability of itself imposing substantial financial damage on western economies by restricting oil and gas supplies, and possibly by cutting off wheat exports as well as restricting imports from countries imposing sanctions, among others. True this would further damage the Russian economy but the nation’s rulers may feel that is a worthwhile sacrifice – and no-one should doubt the Russian peoples’ capacity for absorbing economic pain, particularly if the internal political spin puts the problems all down to the wicked Americans and their European allies which it is doing very successfully at the moment.

And this all has the propensity for escalation from the current uneasy stand-off, to a resumption of the Cold War and even escalation into a limited Hot War should NATO move into Ukraine – a move President Putin sees as totally unacceptable. But increasingly hostile rhetoric and action on both sides could well lead to this taking place. That is indeed a scary scenario for Europe in general and former Soviet Union satellites in particular. Continued escalation on this front could well lead to an ‘insurance’ move back into gold and if financial institutions start to falter, or collapse altogether as a result of Western bank difficulties, the flow could become a flood.

Meanwhile there is no resolution in sight in Syria and Iraq with fundamentalist Islamic forces still firmly in place despite total Western air superiority. How long before the West has to put troops on the ground to hold back, or defeat, the fundamentalist forces? When religion is involved, defeat is perhaps not an apt word – attempted control may be better. Look at Muslim Afghanistan as an example. The Taliban has supposedly been defeated but still is capable of some horrendous day to day impacts, while the spillover into Pakistan and the rise of similar fundamentalist groups in parts of North Africa has to be deeply worrying. ISIS (or whatever it calls itself now) is unlikely to be able to build its Caliphate covering much of the Middle East, North Africa and even parts of southern Europe to emulate the Moorish empire of the past. However its fanatical support, now with access to oil revenues to provide finance to buy ever more sophisticated weaponry, may provide a military headache for the Western/Christian/Moderate Muslim alliances for many years to come.

New mined gold supply is peaking as pipeline projects come on stream and build up (but leaving very little new in the pipeline now to replace depleting and uneconomic resources). The industry’s unprecedented cost cutting exercises will have put back new mine developments by many years and pushed back possible expansion plans.

The other major source of gold for the markets comes from scrap, but the lower prices have put something of a dent in supplies from this source. And much will have also been drawn out in 2009/10/11 when the gold price appeared to be rising inexorably and calls for individuals to sell unwanted gold jewellery were at their peak. Probably much less such metal is available to the markets nowadays.

On the negative side for gold, the metal price has shown weakness for three years now despite many of the above factors already being in play. Chinese demand hit a record in 2013, yet the gold price plunged. Sales out of the big gold ETFs will have been a factor that year. In 2014 too there were some significant sales out of ETFs as well but at perhaps only around 15% of those in 2013 and while there could be more to come from this source the amounts will likely diminish further. Nonetheless there are forces working against the gold price – and these may be even more prevalent in the much smaller silver market. The markets for both precious metals appear to being driven by the paper futures markets with relatively little physical metal changing hands.

There is a theory out there – not one believed by all – that the big money bullion banks are manipulating the gold price for their own ends – either to buy and make enormous profits when the market turns again, or at the behest of the U.S. Fed and other central banks. These may feel that a strong gold price would be seen as yet a further indicator of substantial weakness in the global fiat currency system and would act as a destabilising factor in efforts to portray national economies as being stronger than they actually are. With major bank analysts mostly still bearish on gold – some more so than others – one does not know if this represents collusion with those seeing lower prices as in their best interests, or strongly held beliefs – but regardless of which these do tend to take the form of self-fulfilling prophecies as the big bank analysts will have very strong followings amongst the financial institutions in particular.

So there are strong pressures out there both for and against gold and it is difficult at this stage to predict which will win out in 2015, although one has a strong feeling that the long term future for the gold price is very positive – but then long term is a somewhat indefinite time period. So where will the gold price be 12 months from now. Here I’ll take a leaf out of Martin Murennbeeld’s book and come out with three price scenarios, and apply a weighting to each to come up with a final median prediction.

1. The high price scenario (probability weighting perhaps 15%) – Gold at $2,500, silver at $55.

2. Low price scenario (probability weighting 20%) – Gold at $1,000, silver at $12.50

3. Middle price scenario (probability weighting 65%) – Gold at $1325, silver at $24.

If we average these out we get a final median figure of: Gold $1396.50, Silver $26.35. Well it’s probably as good a guess as any at this time of year!