Commodities | Aug 29 2011
– Heightened global risk is underpinning the gold price
– Additional demand-supply factors provide support
– Analysts are lifting their price forecasts
By Greg Peel
Having “gone parabolic” in the last couple of weeks, it was of little surprise that a downplaying of any QE3 expectation proved the trigger required to spark what for many has been a long awaited correction. Physical gold passed US$1900/oz last week and then plunged to US$1760/oz. But on Friday night Fed chairman Ben Bernanke left the door at least ajar for QE3 of some shape, helping gold to retrace its fall to US$1827/oz last night.
When gold passed US$1900, respected trader Dennis Gartman reduced his longstanding gold position by two thirds, fearing that the gold bull market might actually be over for now. The one third he retained is indicative that the signals are not yet in place. In his newsletter of last Friday Gartman suggested a breach of US$1833 again on the upside would mean a return to a bullish stance.
While Gartman waits to see which way gold will move from this poised position, Barclays Capital is among those who see only a healthy correction from a hysterically overbought position. Barclays believes the uptrend remains intact.
Further monetary policy stimulus from the Federal Reserve would be inflationary, put downward pressure on the US dollar and further upward pressure on gold, with the correction providing a less giddy entry point. With no clear path being indicated at Jackson Hole, we will now have to await the Fed's next policy statement on September 20 and keep an eye on US economic data in the meantime. However, the trigger for gold to move even higher still is more likely to come out of Europe, the way things are going.
Resistance to the European Financial Stability Fund (EFSF) in Germany is threatening to bring down the Merkel government. Chancellor Merkel and colleague President Sarkozy have drawn criticism from some in Europe for rejecting the notion of a eurobond as the answer to Europe's debt problems, but have sparked criticism at home for suggesting a move towards a closer fiscal union. Damned if you do etc. Germany's usually silent president shocked his people by last week piping up to condemn the ECB's purchase of Spanish and Italian bonds as being “far beyond its mandate”, and warning that closer fiscal union strikes at the “very core” of democracy, the London Daily Telegraph reports.
Germany's central bank has joined the throng, criticising ECB bond purchases and suggesting the European Union is drifting towards a union of debt without “democratic legitimacy”.
Yet the fate of Europe lies very much in the hands of politicians. The Social Christians party, which forms part of Germany's governing coalition, is to release a document suggesting changes to the eurozone treaty which would allow debt-ridden eurozone members to go bankrupt and be ejected. In the meantime Merkel faces a revolt from within her own Christian Democrat party, with many members suggesting they will vote against the EFSF. An increase in funding to the EFSF is planned by eurozone authorities, albeit by nowhere near as much as the two trillion euros economists estimate will be needed to insure against default from Spain and Italy. Approval for the increase has to be granted by seventeen different parliaments.
In the meantime, as I noted last week, Finland is leading a group of eurozone members who are not Germany or France, but not in trouble with debt, in insisting on collateral payments form Greece for bail-out money heading that way. This angle also threatens to block the EFSF.
In a climate of such heightened risk, it is hard to see gold seriously tanking. And with such risk in mind, be it European or American of origin, analysts have been rejigging their gold price forecasts.
It's not only a matter of risk which analysts see as the driving factor for gold. In the decade before 2010 developed nations sold some 450 tonnes of gold reserves but in 2010 not one ounce was sold. By contrast, the central banks of developing nations began buying gold in 2010 and purchases in 2011 to date have exceeded those.
Despite higher prices, Chinese gold demand continues to grow and analysts expect China to soon match India in terms of demand for gold jewellery. While both cultures purchase gold for ceremonial reasons, the Chinese have an added incentive given few other investment options. Deposit rates in China remain negative in real terms, so zero-interest gold is actually a better bet. Indian dealers do not expect a rush at US$1900 in the upcoming wedding season beginning next month, but suggest demand is underpinned at US$1700.
In every year since the gold price turned northward in the early noughties, Indian price tolerance has ratcheted up behind it, providing constant support on any price correction.
And while the demand side is looking fairly clear, the global supply side continues to offer dwindling grades and discoveries. Further supply pressure is being added due to mine worker strikes in South Africa.
The rise in the gold price has been so swift recently that the three month average price is only a shade over US$1600, and the year-to-date average is a shade under US$1500. National Australia Bank analysts expect gold to have averaged US$1600 by the end of 2011. This view is supported by that of Barclays' analysts, who see gold averaging US$1725 in the September quarter, US$1875 in the December quarter and US$2000 in full-year 2012.
ANZ Bank analysts go a step further, suggesting a peak in the gold price at US$2200 in mid 2012. This forecast was updated last week from a previous US$1800 target.
ANZ then believes gold will hit headwinds in 2013, as markets begin to focus on the Fed's exit strategy from its stimulus balance sheet and US interest rates begin to rise.
In the meantime, Goldman Sachs has pencilled in US$2500.