Gold price: bull or bear?

Ines Schumacher | Fri, 08 May 2009 11:33

[miningmx.com] -- STATISTICS show the northern hemisphere summer has historically been a weak period for gold. However, analysts disagreed on whether history will repeat itself this year.

Investec Asset Management said in its April precious metals insight it remains bullish on gold and that prices will defy the historical trend that has consistently seen them fall 10-15% around this time of year.

“We are beginning to think that the expected seasonal downturn in gold prices… may be outweighed by renewed fears about the long-term purchasing power of the US dollar and other currencies,” Investec said.

The US, UK and Japan are implementing programmes whereby their central banks buy government debt, and this, Investec argued, will likely stimulate inflation which will devalue the currency in which the debt securities are denominated.

The US policy announcement resulted in a devaluation of the dollar against the euro and yen and gold moved up by more than $50/oz in the space of a couple of hours to peak at $949/oz when the Federal Reserves said on 18 March it would buy back an additional $1.1 trillion in debt securities including $300bn of US Treasuries.

Investec expects other countries to follow suit and devalue their currencies. “Hence, we could see further decoupling of the old dollar-euro or dollar-trade weighted index relationship with gold and continue to see gold rising in all currencies,” Investec said.

It did temper its views with two bearish scenarios that could be capping any upward run in the gold price.

RBC Capital Markets said in a note: "We look for gold to stage a pullback of 10-15% this summer, suggesting a potential downside risk of $750 to $800/oz."

"With our continued bullish longer-term outlook, we would expect gold to reclaim $900/oz later this year, and perhaps re-test $1,000/oz late in the year or into 2010."

RBC said the weakness in the gold price over the upcoming months is directly linked to reduced activity in the physical market for gold because global jewellery manufacturers are typically not very active during the period.

“In our view, the leading causes of a potentially deeper pullback would likely be associated with increased scrap supply… or due to weakened investment demand for gold,” RBC said in its 5 May gold outlook.

Investec, which concedes it is more bullish than bearish on the gold price, outlined a couple of scenarios that could be capping the gold price.

One is an economic "Goldilocks" scenario, which is "neither too hot nor too cold, sustaining moderate economic growth and low inflation, allowing for market-friendly monetary policy."

"We would expect gold prices to be heavily influenced by any signs that the US toxic debt plans would result in improving economic or financial conditions. Therefore, we believe the primary bear risk to gold is the ‘Goldilocks’ scenario," Investec said.

"This 'Goldilocks' economy would completely remove the safe-haven investment case for gold as a form of insurance against inflation or as an alternative currency. Real yields could once again be obtained in cash and bonds and equities could begin discounting economic growth."

Gold’s safe-haven status drove investment demand up by 182% year-on-year in the fourth quarter of 2008. The record size of gold-backed exchange-traded funds (ETFs) of 1.4 million tonnes is nearly half the amount being mined every year.

If investors started switching out of ETFs, this gold would come back onto the market, placing tremendous pressure on the metal's price.

The second scenario looks at supply and demand fundamentals, with scrap flows of gold showing strong growth.

In April, GFMS said investment in gold will be the driver to push the price to $1,100 or more this year, further damaging an already battered jewellery sector and increasing scrap supplies into the market. Prices could come off over the next five years as that investment dries up and retreats, said GFMS CEO Paul Walker.