Gold is now heading for a third year of declines and is 40% below the record high of $1,920 an ounce, reached on September 6, 2011.

By Clyde Russell
Launceston, Australia

With gold falling to a seven-week low it may seem an odd moment to outline the case why the gloom over the yellow metal may finally be starting to lift.
Spot gold dropped to $1,103.90 an ounce on Thursday, the weakest since Sept. 16, and is getting close to the 5 1/2-year low of $1,077 reached in July this year.
The usual suspects of looming higher US interest rates and a stronger US dollar are being blamed for the latest bout of weakness, but while gold may struggle in the short term, its medium-term outlook is somewhat more promising.
Gold is now heading for a third year of declines and is 40% below the record high of $1,920 an ounce, reached on September 6, 2011. While this looks ominous, it’s worth noting that gold has stabilised in a range around $1,070 to $1,300 for much of the past two years.
While a period of relatively low volatility doesn’t by itself indicate a rally (or a collapse) is imminent, it does show that the strong selling period of 2013 is history.
What will drive the gold price over the medium-term? Short-term factors and news events can always shift gold (and other asset classes), but over time the price tends to be driven by the big picture.
Gold was pushed to the record high in 2011 by an unusual combination of events that many analysts mistakenly believed would persist for a considerable period of time.  This was a Western fear of monetary meltdown in the wake of the 2008 global recession, strong physical demand from India and China on the back of a rising middle class, and unprecedented buying from central banks, particularly those in the developing world.
While the Western fear trade has largely disappeared, the China and India story is coming back and central bank demand remains solid.
China and India account for just under half of physical gold demand and here the outlook is positive over the medium term. China’s sluggish second-quarter demand this year ended with a sharp rebound in the third quarter, with 196 tonnes representing a 3% year-on-year increase, according to data from Thomson Reuters GFMS.
The collapse in Shanghai’s equity market will have acted as a reminder of gold’s use as a store of value, and if the precious metal can continue even a mild uptrend, it will encourage China’s consumers to both jewellery and bars.  China’s gold consumption rose 7.83% in the first nine months of the year compared to the same period in 2014, the China Gold Association said on November 4.
Backing this figure up was data showing that China’s net imports from Hong Kong, the main conduit for gold to enter the mainland, jumped to a 10-month high in September, with imports having gained for three straight months.
India’s jewellery consumption also roared back in the third-quarter, rising 5% year-on-year to 193 tonnes, the highest quarterly total in seven years, according to GFMS data.
With a rising middle class, brighter economic outlook and a cultural affinity toward gold with perhaps no equal elsewhere in the world, it’s hard to see anything other than positive demand growth in India over the medium term.
There is a risk to Indian demand if Prime Minister Narendra Modi’s plans to encourage people to monetise their hoarded gold by depositing it in banks does result in the freeing up of stored gold.  If successful, this could cut gold imports by India as more domestic gold would be available, but it remains unclear whether the population will embrace the scheme, given a preference to hold physical metal over paper.
Central bank buying is also holding up strongly, with net purchases of 132 tonnes in the third-quarter of this year, a gain of 13.1% over the same period in 2014.
With many developing nations wishing to diversify their foreign reserves, this is likely a trend that will continue, especially if China and Russia continue their programmes of gold buying.
Still, there are always factors that can undermine gold prices, and two stand out.
The first is the likelihood of rising interest rates in the US, which tends to draw money into fixed interest products and away from bullion.
However, the much-anticipated move by the Federal Reserve has most likely been largely priced into gold for some time now, and it’s also likely that the tightening cycle will be long and slow, meaning it may not be as bearish for gold as some analysts anticipate.
Mine supply is another potential bearish factor, with several new mines coming on stream in the next 18 months, having been approved at the time that gold looked set to soar beyond $2,000 an ounce.
But older, more expensive mines may be closing at a faster rate than new output is arriving, with GFMS estimating total mine supply will decline slightly this year, to 3,124.7 tonnes, before dropping again in 2016 and 2017.
Overall, the positive drivers for higher gold prices are gaining ground, while the negative factors appear to be losing influence. While there isn’t enough to suggest a strong rally is around the corner, there are compelling reasons to believe that gold will gradually appreciate over the medium term.

♦ Clyde Russell is a Reuters columnist. The views expressed here are his own.