The July breakdown in the price of gold feels like the end of the last bullish hopes for the gold bugs. Or is it? The World Gold Council (WGC) is of course a pro-gold group, so it may not be surprising when you see them issue positive views on gold. Still, sometimes the group does have some caution and insight that is useful for bulls and bears alike.

The WGC’s outlook for the second half of 2015 aims to factor in the drop in the price of gold seen in the first half of 2015. The real issue is how the council sees higher interest rates and a strong dollar against gold ahead.

24/7 Wall St. would remind readers that gold’s last leg down has been in July, since the end of the second quarter. It cannot be ignored that there has been some serious technical damage done to gold’s long-term chart, with the move to under $1,100 per ounce now creating five-year lows. This needs to be kept in mind in the WGC’s outlook. Traders also will want to consider that the old support levels of $1,150 to $1,200 are now likely to be considered the new resistance levels by many traders.

24/7 Wall St. has even warned that gold prices may remain weak for some time now. In fact, or opinion, some are starting to think gold could go back and test the $1,000 per ounce mark. That might be another psychological blow to the shiny yellow metal. Now you can at least consider yourself warned, with at least some caveats to an outside bullish view.

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While gold’s drop may be puzzling to some investors, the WGC’s view is that this is more consistent with market expectations that the risks the markets were facing could be contained. And as far as the coming interest rate hike or hikes by the Federal Reserve, the council said:

We believe that the gold price already reflects a possible rate hike later this year and that the US-centered perspective is missing a more comprehensive view of the market.

Another issue is that the WGC gave several headwinds and tailwinds that could face gold in the second half of 2015.

• Current market risks seem to be contained to either a sector or a region, but a prolonged environment of low rates has increased risk exposure globally.
• Volatility in the U.S. stock market remains relatively tame and, historically, these periods are good opportunities for investors to buy portfolio protection.
• Gold reduces portfolio losses during tail-risk events (like Greece, China, Iran, etc.).
• While higher U.S. interest rates may put pressure on the gold price, economic growth is not necessarily bad for gold and its strategic role in portfolios.
• Exchange traded fund and futures flows have improved since 2013 from the United States and Germany, and this suggests better sentiment among gold investors than the previous two years.

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As far as how higher interest rates and a strong U.S. dollar will impact gold ahead, the WGC gave the following outlook:

Higher rates and a strong US dollar may bring adjustments to gold, but we do not expect an upheaval. Some investors believe that higher real US interest rates and a strong dollar will always be bad news for gold. We believe that the reality of the gold market is far more nuanced and interesting. In terms of US dollar strength, our analysis shows that the relationship between gold and the dollar is asymmetric. Historically, the gold price has increased more when the dollar was weak, than it has fallen when the dollar strengthened. And while the dollar may have further room to appreciate against the euro, it has lost ground against other currencies.

The WGC gave two key reasons why the long-term price of gold may be able to withstand higher interest rate levels:

The negative relationship between real rates and gold is related to investment, but not all gold demand is investment. Higher interest rates increase the opportunity cost of investing in gold. However, jewelry and technology demand make up almost 60% of annual physical gold demand. For these markets, there is an indirect positive relationship to interest rates.

The US interest rate argument is not as strong today as it was in the past. This case was built largely on an analysis of gold and interest rate performance during the 1970s and 1980s, when economic conditions were very different from today. The gold market is different too. Developed-market gold demand has declined to less than 30% over the past decade from more than 60% in the 1970s.

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Again, 24/7 Wall St. would remind readers to consider the latest trends in gold that have been seen in July. China remains a wild card ahead, but the issues around Greece and Iran are, at least for the time being, believed to be removed from the immediate geopolitical risk horizon.

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