David Davis, Credit Suisse Standard Securities
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Calm before the storm -- gold set to rise
Julie Bain
Posted: Fri, 27 Jun 2008

[miningmx.com] -- THE factors which propelled the gold price to an all time high in March are still in place and it is just a matter of time before the bullion prices once again breaches $1,000/oz.

"This is the calm before the next stage of the hurricane. It is very much the case that the same factors that have been in place since March are still there. Perhaps people to some extent got used to the sub prime issues," said Nikos Kavalis a senior analysts with GFMS in London.

Traditionally the gold price languishes while those in the north head for the sea and the lakes for their holidays but come autumn and winter the gold price may look very different.

"The summer (northern hemisphere) months historically have been quite poor for gold, very often it is a quiet period for investment activity, you can see it in the market at the moment," said Kavalis.
The underlying issues are very much in place
Still, you have to wonder why the gold price slipped since it climbed to $1,011/oz on 17 March because all the supporting factors for the rise in the price remain: the oil price is strong, the dollar is weak and the US economy is stumbling. The average gold price in the first quarter was $924/oz. The spot gold price is currently around $920/oz.

"The underlying issues which helped gold to $1000/oz are very much in place. At the time there were bubble elements around and the rally over shot if you want and the liquidation that we saw was very useful for the next leg of rally. We expect a rally will take place in the next 6 to 12 months, probably in 6 months and very likely in the last quarter," Kavalis said.

"The gold price north of $1,000/oz is extremely probably, the price testing $1,200/oz is not improbable at all," he said.

Dave Davis a precious metals analyst with Credit Suisse Standard Securities backs this sentiment.

"There are seasonality changes with gold. At this time of year the gold price slips and follows a sideways movement. We will start to see the gold price going up in the later part of the year. There is no doubt in my mind the price will be over $1,000/oz by Christmas," said Davis.

He said that as the northern hemisphere goes into winter there will be more reasons for the oil price to rise such as cold weather sparking worries about supply and inflation.

In addition to the changing season supporting a rise in the gold price, a slew of factors which will push the price higher persist.

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Kavalis said given the factors that are in place (sub prime, weak dollar, inflation/oil price) it would only take, perhaps, a geopolitical incident to push the gold price even higher than the previous record.

There are other supporting factors with gold company de-hedging continuing to have a positive impact going forward. There is no expectation that producers would do a volte-face and suddenly pursue a policy of significant hedging. The European Central Banks, which have already given themselves a quota for gold sales in order not to disorientate the market, may not even make sales which fill the 500 tonne quota.

"Central banks have made enough statements that gold will remain an important asset to them," said Kavalis.

"Either way we may see prices we have not seen before, there are enough synergies which have the high probability of occurring in the not too distance future," he said.

"First of all it is most likely there will be something from the sub prime universe. We are very far from resolution of the issues. I would say we are still far from the bottom," said Kavalis.

Davis said that the supply and demand fundamentals are still in place for a long-term rise in the gold price.

"Mine supply is diminishing. Even if the gold price does rise further and jewellery demand dropped even more the drop in demand will be off set by possibility that Central Banks are not delivering into the system," said Davis.

The dollar too remains weak, although it has strengthened to a degree against the Euro, perhaps, making dollar-priced gold less attractive for investors with Euros to spend, at least in the short term. The dollar, though, will be knocked again by any further slowing in the US economy.

The Federal Reserves decision on Thursday not to raise rates reflects its attempt to strike a balance between stimulating the economy lower rates encourage more investment and restraining the economy higher rates curb spending and the inflationary menace.

In the next six to 12 months, though, Kavalis is convinced the down side risk for gold is limited. He said even if the Fed were to raise rates in an effort to curb inflation he suggests such a move may be fruitless.

"It is arguable whether it (rate rises) would have a serious impact on inflation; I'm not convinced it would really thwart inflation. I think the inflationary pressures are more structural," he said.