Commodities | Jul 05 2012
By Greg Peel
“US QE3 is now mainstream thought and manna from heaven for gold bulls'” suggest the RBS commodities analysts.
It's been a scary ride for gold investors from June into July as first a “risk off” response to more euro-fear sent prices plummeting as the scramble was on to raise cash, before a “risk on” reversal after good news from the EU summit sent gold scurrying back up again. It was as a result of the EU summit Germany's Angela Merkel finally conceded to the new found pro-growth push among recently elected eurozone leaders to agree to a stimulus injection after years of sticking stubbornly to austerity demands.
Stimulus, by its implication, implies a further devaluing of the euro through “money printing” and expectations are for the ECB to back up the politicians tonight with at least a 25 basis point rate cut to an historically low 0.75%.
“The economic case for a 50 basis point rate cut is pretty watertight,” suggested a BNP Paribas economist last night (as reported by London's BullionVault), “but for now it's easier to just cut by 25 basis points – that is enough to show you're standing ready to do something”.
The ECB meeting has taken the spotlight away from the Bank of England's own policy meeting tonight, at which it is expected a further GDP 50bn of quantitative easing (more money printing) will be agreed upon.
And speaking of QE, deteriorating US economic data in recent months have some, if not all, assuming Fed governor Ben Bernanke will announce QE3 at the Jackson Hole Fed conference in August. Both QE1 and QE2 were announced in the mountain-top retreat. Must be the lack of air. And as RBS suggests above, gold bulls love QE.
While the quick snap-back in the gold price post-summit smacked of a good deal of short-covering, renewed interest in gold cannot be denied. The month of June saw net inflows of 33.2 tonnes into physically back gold exchange-traded fund (ETF) holdings, taking total holdings to 2,477 tonnes – an amount which matches March's month-end record.
[Note: Physically backed gold ETFs allow investors to acquire a charge over an amount of actual gold held in a prescribed bullion vault without the investor having to store or insure that gold. Unlike forms of “paper” gold, such as futures, the ETF investor should actually be able to go to the vault and be shown his or her metal. Australia has its own gold ETF managed by the Perth mint which can be bought and sold on the ASX under the ticker code GOLD.]
Commodities analyst Jonathan Barratt of the Barratt Bulletin has maintained a bullish gold position during recent price movements, while conceding to a certain nervousness with each dip. “We have talked about the shifting paradigm of investments in gold via ETF markets,” Barratt said in his Bulletin this morning, “where we have suggested that investors look towards these investment vehicles as a way to get pure exposure to the metal”. Barratt's confidence in his position was underscored after gold again bounced off the strong support level at US$1550/oz in this last dip.
“Remember that from 2008 to 2011 when the Fed embarked on QE1 and QE2 the price of gold almost doubled,” Barratt reminds us. “Holdings in gold ETFs have just reached a record high which takes the [volume] gain to 2.4% this year”.
We might also recall that while gold may have bounced off the 1550 support line, it also traded at over 1900 earlier this year. At just over 1600 currently, we're a long way down from the high despite the Fed's “Operation Twist” basically extending the life of QE2. At 1550, gold has this year suffered its biggest correction in the long bull market run.
Healthy perhaps? Or is the world becoming a bit gold fatigued? It has been said that anyone of note who has wanted to buy gold already has by now, leaving not a lot of scope for another strong push higher.
Deutsche Bank has this week cut its average 2012 gold price forecast to US$1726/oz from an earlier US$1800/oz, with analysts citing the “holding pattern” they say has been adopted by central banks. For next year, however, Deutsche has set an average target of US$2050/oz – 25% above today's level.
“While we question the effectiveness of [monetary policy] in sustainably supporting growth in the western world,” Deutsche suggests, “we do believe that it will have the effect of pushing up gold prices as the metal responds to the implied erosion in the value of money in dollar terms”.
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