Commodities | Nov 22 2011
– ANZ remains bullish on gold
– European buying seen as a sign of economic stress
– Higher prices may limit Asian buying
By Chris Shaw
Gold recorded solid gains in October, closing the month 6% higher. As ANZ Banking Group notes, the metal was helped by signs Europe was finally making progress on its debt problems and as gold again became a safe haven play for investors.
The bank's senior commodities strategist Nick Trevethan suggests in November the outlook for gold remains positive, as sovereign debt issues are still a concern and there continue to be risks to the global growth outlook.
Trevethan is forecasting a year-end price for gold of US$1,850 per ounce, with a push through the US$2,000 per ounce level likely in 2012. These further price gains are likely to be harder won and much slower given the volatile correction in the gold price seen in September.
What should support the gold price in Trevethan's view is that the appetite for, and the wealth needed to buy, gold in emerging economies is increasing. At the same time, low interest rates and government stimulus measures in the West have made the opportunity cost of investing in gold very low. This positive environment is expected to persist for another year or two.
A contrast to 1980, when gold previously enjoyed a strong run then a severe correction, is the gold market now is significantly different. As Trevethan notes, the gold market in the 1980s was dominated by professional investors whereas today retail investors have far greater access to a number of products that offer easier exposure.
This suggests to Trevethan an expected return to a weakening trend for the US dollar, this given ongoing stresses in the global financial system, will continue to support the investment case for gold and so keep investor interest at elevated levels.
According to Reuters market analyst Clyde Russell there were two surprise elements to the World Gold Council's third quarter report – a strong jump in European gold demand and a slide in Indian demand. The former increased by 135% to 118.1 tonnes in the period, while Indian jewellery consumption of gold fell by 26% to 203.3 tonnes for the quarter.
The increase in Europe was enough to drive a 6% overall gain in gold demand to 1,053.9 tonnes for the quarter. Much of the increase in Europe was from German buying, accounting for half the bar, coin and investment demand in the region.
Russell suggests the buying in Europe was a sign of economic stress, as the numbers show the sale of used gold jewellery was enough to meet demand for new jewellery. This implies the sale of family heirlooms to prop up household finances.
In terms of where to next for European gold demand, Russell suggests if Greece, Italy and Spain can stay in the euro currency and convince markets there is a viable plan to resolve the debt crisis, then safe haven money flowing into gold should reduce.
The flipside of a messy breakup of the common currency and associated financial carnage would boost gold in Russell's view. But regardless of Europe, Asia remains the long-term story for gold demand.
While Indian buying fell in the September quarter Russell attributes part of this to the recent drop of the rupee against the US dollar, the Indian currency falling 14.4% since the start of the third quarter. As well, The September quarter tends to be seasonally weaker for Indian buying.
Russell suggests as long as inflation remains high in both India and China there should be solid demand for gold as a hedge, especially as alternatives such as shares are under pressure. But higher prices are still likely to impact on demand, so Russell sees some risk if the gold price breaks the US$2,000 level there is scope for Asian buying to fall away.
Barclays Capital notes recent fears of European contagion were enough for the gold price to slip below US$1,750 per ounce, but the uncertain outlook suggests the backdrop for gold prices remains favourable.
From a fundamental perspective Barclays notes while physical demand from Asia has slowed, interest appears set to re-emerge on the back of any further dips in price. Other figures support this view, as Barclays notes the World Gold Council report suggests gold demand for the full year could hit a record of 750 tonnes.
Central Bank buying has also picked up according to the Council, coming in at 148 tonnes for the September quarter. Current total central bank buying for the year is 348.7 tonnes, an amount already ahead of the full year estimate of 325 tonnes made by Barclays.
From a technical standpoint, Barclays suggests the near-term view for gold is bearish, as the daily cloud top confirms a likely move to congested support in the US$1,675/$1,680 per ounce region.
Technical limitations
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