Commodities | Jul 04 2006
By Greg Peel
When gold passed back through US$600/oz on the way down the jewellers returned to the market. When the big dump stalled around US$550/oz the ETF buyers returned. When the Fed alluded to a more dovish approach last week ETF buying accelerated. It doesn’t all mean, however, that US$775/oz will be tested again quite so soon.
For starters, there would have been some inexperienced investors severely burnt by the gold price correction. The Johnny-come-latelies who jumped on the bandwagon towards the top and fuelled the final bubble – just like every other bubble – will not only be singed but a bit gun-shy now as well. It is not likely we will see that sort of upward momentum, in what is traditionally a slow-moving asset, return in the near future.
What is also not a given is that this subtle moderation in Fed rhetoric ensures inflation worries are behind us. The US economists at Barclays Capital, for one, are still calling a 6% Fed funds rate by October. Their analysis suggests the US economy is holding up better than expected and inflation pressures haven’t gone away.
The conundrum is that inflation pressure should be positive for the gold price, so long as the US dollar is not collapsing. By definition the USD gold price should fall if the USD rises, and Comex in New York is the biggest gold market in the world. Barclay’s forex team think the US dollar is presently oversold. If the Fed becomes aggressive again, the dollar will rise.
What does this mean for the gold price? Barclay’s suggests a bit of sideways in the price in the third quarter. There will be conflicting forces and, since the boom/bust of 2006, less volatility as the unsure remain on the sideline until a definitive trend emerges once more. Barclays believes the fourth quarter is when the Fed will be closer to specifically calling a pause, leaving the dollar free to fall and the gold price to rise.
Supporting the case for lower volatility is the state of net speculative positions on Comex. "Speculative length" (ie long positions) has reduced due to both liquidation and fresh shorting. "Gross length", or all of the long positions, has fallen to its lowest level since August last year. This implies there will not be further violent corrections in the short term.
In other news, FN Arena asked the question recently: what happened to central bank buying? Having heard talk from China, the Middle East and elsewhere of diversifying reserves into gold, nothing has actually happened. Well the UAE central bank governor has indicated he wants to convert 10% of reserves into gold, but not at these prices. One wonders what prices he’s hoping for.
A Chinese academic has also come out and suggested China should increase its gold holdings. In both cases, Barclays is not giving the reports any credence but notes such talk only provides support to the gold price rather than anything else.