Commodities | Oct 12 2009
By Chris Shaw
National Australia Bank suggests there are a number of reasons why gold has broken through the US$1,000 per ounce barrier in recent sessions including safe-haven buying, US dollar weakness and expectations of an increase in inflationary pressures. All of these factors have worked to lift investor demand for the metal, which has helped offset weak jewellery demand as higher prices have kept activity at this end of the market subdued.
As an example of renewed investor interest in gold, the bank’s economist for Australia and commodities Ben Westmore notes demand for physical gold by Exchange Traded Funds or ETFs jumped in September, gaining by 3.3% after having been relatively flat for the past several months.
What should support prices going forward in his view is a continuation of solid fundamentals in the market, as he expects supply to remain constrained in coming months. Mine supply is expected to remain broadly flat while recycled gold supply, after rising strongly in the first months of 2009, fell by 41% in the June quarter. Higher prices are needed in Westmore’s view for this source of supply of the metal to remain at current levels.
According to Westmore, the gold price should remain volatile in the shorter-term given the level of investor activity in the market but with his prediction being for consumption to recover in 2010 at the same time as supply remains constrained, he sees further gains forthcoming for the gold price.
Westmore’s quarterly price forecasts call for a year end level of US$996 per ounce, before gains to push the price to US$1,012 per ounce in the March quarter, US$1,029 per ounce in the June quarter and US$1,074 per ounce by the end of 2010. All these prices are quarterly averages.
This puts Westmore in a more optimistic class than CIBC World Markets, which takes the view gold prices are likely at or near a peak at present given the potential for some recent factors supporting the price of the metal to reverse. These are seen as significant enough to cause the group to move from an Overweight rating to an Underweight rating on gold.
The US dollar is a key element in CIBC’s changed view just as the greenback is a key factor for the gold price generally. CIBC estimates currency movements have accounted for between half to 75% of the move in the gold price in recent months. The greenback has weakened during that time and so pushed gold higher. Taking a two to three year view CIBC suggests the currency could depreciate further to address growing balance of payment issues related to the US Federal Budget.
But shorter-term CIBC suggests the move down in the US dollar has been overdone, increasing the chances of a 6-8% relief rally in the currency sometime in the next two to three quarters. Were this to happen it would suggest some of gold’s recent lustre will be removed.
As well, CIBC analysts see scope for financial markets generally to continue to become more positive on the global economic and financial outlook and as investor nerves are reduced so too is the attraction of safe-haven assets such as gold. There is also not likely to be much in the way of inflationary pressures pushing the metal’s price higher in the short-term, as CIBC notes inflationary pressures appear very subdued at present, while market expectations are at a more exaggerated level. Any unwinding of these expectations would put downward pressure on the gold price in the analysts’ view.
Another reason CIBC is not overly bullish on gold in the shorter-term is the metal is now expensive relative to oil and other commodity prices, especially as during periods of economic stabilisation gold’s ratio to oil and other commodities tends to fall. This suggests the more industrially sensitive commodities may offer better returns at this point in the cycle.
The final factor supporting CIBC’s contrarian view relates to producer de-hedging as the analysts point out the closing out of hedging positions by gold miners has added significantly to physical gold demand in recent years, to the tune of around 360 tonnes in 2008 alone. But as this trend has largely run its course, this additional buying in the market simply won’t be there to the same extent in coming years.
Factoring all this in, CIBC is forecasting year end prices of US$950 per ounce this year, falling to US$900 per ounce in 2010 but rising to US$1,100 per ounce in 2011.