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A week in gold: No escape from the dollar's rise

Published: 02:31 27 Sep 2014 EDT

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Gold remained in thrall to the dollar and US bond yields with attempts at a rally last week brief and tepid.

Citigroup summed up the mood with a downgrade of its forecast for the gold price over the remainder of the year, though 2016 may offer some respite for investors and gold miners, if they can hang on that long.

The US broker has cut its 2014 average forecast to $1,275 an ounce, from $1,300 previously, while the 2015 forecast is now 10% lower at $1,225. A rebound is still predicted for 2016, but to $1,300, compared to $1,380 previously.

The continued rise in the US dollar is the reason the US broker has trimmed its forecasts.

This has been the dominant theme for weeks now, but is set to continue as markets move forward their expectations for a US interest rate rise in 2015.

 “The growing expectation of 2015 US interest rate increases has reduced investor interest in holding gold, while its risk-related source of support has been diminished as the vestiges of geopolitical support that had pushed prices to $1,345/oz,” it said.

The hostilities between Ukraine and Russia helped gold spike higher, but the situation has calmed down following the outline for a truce agreed earlier this month.

There was also little reaction to the airstrikes by the US and a group of its Middle East allies against IS militants in Iraq and Syria at the start of the week.

Gold and the dollar are traditionally seen as moving in different directions, as one counters the other, and Citigroup said this negative rolling correlation has re-emerged since the second quarter.

The spot price hit a nine month low of just below US$1,207 Thursday, as all of the gains seen earlier in the year were eroded. 

The rise in the first six months was helped by a slowdown in sales of the metal through exchange traded funds, but this trend picked up again over the past few weeks. 

At 1,695 metric tons, ETF holdings are at their lowest level since late 2009 though compared to a year ago sales have been modest.

Last year, there was some offset from physical demand especially from China, but demand from the Chinese this year still remains unexpectedly weak. 

Latest statistics showed only 27.5 tons of the metal was shipped from Hong Kong across the border in August, only marginally better than July, which was the worst month  for almost three years.

Net gold imports from Hong Kong are a third down on this time last year are set to fall well short of last year’s total even if it picks up in the next few months, said Commerzbank.

So far, the price slide has not sparked any revival of physical demand, added the broker. 

“Evidently buyers in Asia are holding back in anticipation of even lower prices. Thus the gold price remains more dependent on Western investment demand.” 

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