Commodities | Nov 01 2011
– Some similarities for gold market between 2008 and now
– Barclays sees a number of factors as supportive for the metal
– Positive backdrop suggests further gains are likely
By Chris Shaw
In late September the gold price fell by 10% in just four trading sessions, a price movement Barclays Capital notes was enough to draw some comparisons with the price action and environment experienced in 2008.
In 2008 the gold price broke the US$1,000 per ounce barrier in March but was back below US$700 per ounce by October, as gold was liquidated to meet the needs of margin requirements elsewhere in financial markets. Prices then slowly recovered, not breaching the US$1,000 per ounce level again until the first quarter of 2009.
This year the move was quicker as from an all-time high of more than US$1,900 per ounce on September 6, it took less than a month for the price to fall below US$1,550 per ounce as risk aversion and the need for liquidity weighed on the price of the metal.
The common link between both periods according to Barclays is a fragile macro environment, something that remains the case at present given ongoing sovereign debt issues in Europe, US deficit issues and general uncertainty with respect to the global economic growth outlook.
One difference to 2008, notes Barclays, is financial markets and economies today do not look as vulnerable to collapse as was the case three years ago. At present there are high levels of liquid assets and low levels of risk, which Barclays suggests should help the global economy avoid sliding into recession.
As Barclays points out, traditionally gold prices have followed a different trajectory to equity markets, but there are periods when both markets move together. As an example, the one-month correlation between gold and equity prices turned positive in October, matching a similar turn in September of 2008.
The asset allocation experts at Barclays suggest if the global economy can in fact avoid a recession, which is suggested by current robust US economic data, there is potential for gold to return to a “risk on” environment as inflationary concerns would again come to the forefront. This would sustain a supportive macro environment for the gold price.
In the view of Barclays, while credit concerns persist, in Europe in particular, these are not the key driver of the gold price this time around. There remain three steps required to restore confidence in European banks and to spur a sustainable spread rally, something which would be expected to offer some additional support to gold prices.
These are the provision of additional capital to ease solvency concerns, the provision of funding support to offset intermittent capital market access and the stabilisation of asset values to provide clarity with respect to future write-downs.
Historically, a weaker US dollar has supported the gold price but Barclays notes a strong US dollar does not prevent gold prices from moving higher. At present Barclays remains bearish on the EUR/USD over a three month time frame given ongoing uncertainties and risks, but assuming European conditions stabilise the US dollar is then expected to weaken again. Gold should be a beneficiary if this occurs, particularly from safe haven buying.
While gold has never been a perfect hedge against inflation, rising inflationary expectations tend to support the price of the metal. With the difference between yields on 10-year US government bonds and 10-year inflation-indexed bonds again starting to tick higher, inflation is once more becoming an issue of importance. Overall, Barclays expects inflation may not fall significantly, which means ongoing concerns with respect to currency debasement are a further potential driver of the gold price.
Rising real interest rates should mark the turning point for gold in the view of Barclays, as the current low real interest rate environment has been conducive to higher gold prices as the opportunity cost of holding the metal has come down.
From an investor perspective, Barclays notes while a positive view towards gold has largely not changed between 2008 and now, the preferred means of exposure this time around is via bar holdings rather than through futures contracts or ETPs.
One difference between 2008 and now has been investor interest is not the sole driver of prices, as demand for gold in 2011 has come at increasingly higher price levels. Had this not been the case, Barclays suggests price action would have been much more volatile, so creating a significant gap for investment demand to fill.
Barclays also points out the supply side response has been slower this time around, in part because central banks have turned to net buyers having been net sellers of the metal in 2008. This not only takes some supply out of the market but introduces a sizable source of demand at record price levels.
For Barclays, the expectation is gold prices should find good support from the physical market before recovering lost ground and again challenging new highs as investment demand picks up. A backdrop of negative real interest rates, concerns with respect to inflation and currency debasement, rising sovereign debt and financial market and economic stability questions all remain favourable for gold.
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