Since the month of June, the price of gold has been steadily declining and in September prices breached the $1,200 an ounce mark. Behind this drop has been a strengthening dollar throughout Q3, supported by higher yields as the US bond market gradually priced in imminent rate hikes. Throughout this period, gold consumption in both China and India has been weak, while investment and central bank demand has remained limited.
According to Natixis, events in the US are expected to exert the biggest impact on gold prices. As the US economy improves, so investors’ need for a safe haven dissipates. With this economic improvement comes a strengthening dollar as the US bond market pushes yields higher in anticipation of interest rate hikes. These factors are expected to have a mildly negative effect upon gold prices over the forecast horizon, given the substantial rally in the dollar and rise in US yields that has already taken place so far this year.
On the producers’ side, there is a risk that miners may return to hedging future output if gold prices threaten to fall below cash costs of production. Due to aggressive cost cutting by gold producers, all-in sustaining costs of production have fallen to somewhere around $960 an ounce. That said, there are still many mines operating at higher costs that could potentially need hedging. This represents a potential source of supply in the market, which could help to accelerate any decline in prices.