Commodities | Nov 07 2012
– Investor uncertainty supportive of gold
– Central bank buying also underpinning
– New supply may dampen strength
– Analysts divided on price
By Eva Brocklehurst
Investor uncertainty is providing sizeable support for gold and it's not going away very soon, analysts believe. When investors lose confidence in paper – stocks and bonds – they revert to a time-honoured store of value – gold. The usual culprit – fear of inflation – helped prices higher in September when central banks in Europe and the US unveiled their economic stimulus plans. Subsequently, gold prices softened a bit but this may have been influenced by activity in the currency markets. As National Australia Bank analysts note, the US dollar appreciated during October, and this in turn increased the attractiveness of holding US currency and bonds rather than gold.
Nevertheless, there is underlying support to gold prices so they're unlikely to head too far south. NAB cites gold buying by central banks as a major factor underpinning prices this year and this is likely to continue. Gold buying by central banks rose to a record high of 158 tonnes in the June quarter, according to the World Gold Council (historical data series began in 2007). World official central bank gold reserves are currently around 31,400 tonnes, up from around 30,000 tonnes four years ago and the supply of gold eased to around 900 tonnes in the June quarter, down from around 960 tonnes in the previous quarter and 1,060 tonnes one year earlier.
What hasn't happened to push up gold demand is producer hedging. NAB analysts note producers have steadily bought back their gold hedges over the past decade. Purchases of gold by central banks, particularly in the developing countries, is seen replacing the diminishing demand from the producer hedge book. Despite a recent slowing in Indian demand for gold jewellery, partly reflecting the introduction of taxes, NAB suspects these sources of increased demand for gold will be enough to completely replace the demand created by producer hedge book buying. Overall, the analysts say, the global hedge book remains relatively small these days.
Gold is typically available from three sources – mined production, central bank sales and recycled or scrap gold. Looking at these components separately, NAB notes mined production remains the driver of increased gold supply and, while recycled gold is also a significant source, it is possible the stockpile of scrap gold is being reduced, as elevated prices draw it into the market.
So, what's likely to affect the gold price in the near term? Deutsche analysts expect a period of range-bound trading for gold and the rest of 2012 to be moderately negative for the precious metal. Deutsche sees the US$1,700/oz, or just below, as a level where opportunistic and longer-term buying is likely to emerge. NAB analysts have lifted their near-term forecasts for the price of gold, and expect an average around US$1,750 per ounce over the December quarter 2012.
Looking further ahead, NAB expects the gold price to ease. Chinese demand for gold should remain strong, supported by rising incomes, and while Indian demand may soften on the back of relatively high prices and a weak rupee, it will remain supportive overall. However, NAB expects more certainty surrounding the European sovereign debt situation to emerge, while a relatively stronger US dollar and a return to fundamentals should also help to reduce prices. NAB analysts forecast an average gold price of US$1660 for June quarter 2013 and US$1560 for the December quarter 2013. Deutsche is far more bullish on the price and expects, countering any selling pressure that may occur in the new year as a result of investor desire to hold more liquid assets, buying from central banks should remain a key support for gold at certain price levels. Deutsche forecasts US$2050 to be reached in 2013.
Future gold mine production is expected to rise as producers take advantage of elevated prices and that in turn should also dampen the price – a bit. Mined supply should also benefit from new projects coming on stream in Latin America and the continued expansion in Chinese gold production, according to NAB. In addition, as copper production intensifies over coming years, more gold should be produced as a by-product. On the downside in terms of production, mined supply may be limited by the continuing maturity of gold mines in South Africa and Indonesia, and industrial disputes, while rising costs may also limit the extent of any price falls.
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