Commodities | May 19 2006
By Chris Shaw (Tokyo)
The shakeout in the gold market and that of other precious metals continues, with each dollar decline in the price creating more uncertainty as to whether the move is a correction of recent strong gains or the start of a more serious collapse in prices.
According to Commonwealth Bank the former is more likely, as it notes hedge funds are happy to take some profits at current levels following the incredible gains in the price since March, when gold gained more than US$150/oz.
There were a few factors contributing to the price gains in the bank’s view, including weakness in the US dollar, the increasing attraction of commodities to investment funds and ongoing tensions in the Middle East generally and Iran in particular.
It also acknowledges many investors see gold as a hedge against inflation and while not agreeing with this view the bank accepts that if enough people are of this view the gold price will likely move higher if inflation continues to increase.
The bank suggests the gold price could yet fall to levels of around US$650/oz short-term as the correction continues, but looking out a few months and beyond it sees the price then moving through US$800/oz.
Commonwealth believes there are still positives in the supply and demand picture such as limited growth in mine production and the potential for nations to look for alternatives to holding foreign assets primarily in US dollars. Whether this includes the Chinese is more questionable in the bank’s view, as it takes the view China is more likely to build up stockpiles of materials it needs for its economic growth rather than gold.
Any resolution of the current situation regarding Iran and nuclear weapons would be negative for the gold price in the short-term in the bank’s view, but such an outcome would not see the end of tensions in the Middle East so the longer-term impact would be minor. A strong move higher by the US dollar could also increase the uncertainty in the gold market, but as the bank suggests, such a move in the greenback appears unlikely given current market concerns over the imbalances in the US economy.
The bank’s forecast trading range for gold through to the end of 2007 is US$600-US$825/oz.