Commodities | Mar 26 2010
By Chris Shaw
Over the past few years the gold price has exhibited a reasonably strong inverse relationship with the US dollar, meaning a weaker US dollar has led to gold price gains.
Citi notes this relationship has been even stronger over the past year, as macroeconomic news flow has been the major driver of major asset markets in that time. But Citi expects 2010 will see a return to more normal market conditions, suggesting the market's focus will return to the specifics of relevant assets.
This process may have already started, as National Australia Bank economist Ben Westmore notes over the past month the strength of the relationship between gold and the US dollar has weakened somewhat.
Westmore suggests one possible explanation for this is the possibility of a sovereign default in the eurozone, with Greece the prime candidate. This has generated reports of investors adding to gold holdings as a hedge against any further large-scale financial shock.
This investment buying has been enough to support the gold price at historically high levels, as Westmore notes jewellery demand has been weak given the stronger gold price. There has also been a lack of buying by the Chinese and Indian central banks, something the market had expected as Citi notes both have low levels of gold reserves compared to the likes of the US and Germany.
Until the middle of last year gold also enjoyed strong buying from Exchange Traded Funds or ETFs, but this has since flattened out. Westmore expects such buying will have a negligible impact on gold demand in the March quarter.
In coming months he suggests investor demand may weaken as inflation expectations continue to moderate, but this is unlikely to be enough to generate any large scale unwinding of holdings. By the second half of 2010 Westmore sees jewellery demand improving as stronger economic growth boosts income levels and the US dollar weakens further.
What should also support prices, in Westmore's view, is ongoing producer de-hedging, as this is reducing the level of physical gold supply. As actual mine supply is relatively inelastic to prices, this has acted as further support for gold, a trend Westmore expects will continue at least through this year.
To reflect this, Westmore sees the gold price continuing to trend higher, his quarterly forecasts suggesting a price of US$1,105 per ounce in March, US$1,148 per ounce in June, US$1,171 per ounce in September and US$1,195 per ounce in December.
Citi disagrees though, taking the view the gold price is now at peak levels and will soften in coming years as central banks tighten policy and lift interest rates and as physical demand for gold declines. Citi's forecasts call for the gold price to average US$1,124 per ounce this year and US$1,121 per ounce in 2011.
Its forecast price falls are more significant in later years, Citi estimating the gold price will average US$1,020 per ounce in 2012 and US$920 per ounce in 2013. Westmore in contrast expects gold will trade above US$1,200 per ounce through 2011.