[miningmx.com] — IF ONE were called to write flashcards to explain how
the gold price behaves, you’d probably need only two; it’s that binary. Put
another way, quiet is bad for the gold price.
Noisy – meaning earthquakes, runaway inflation, or a decision by the US Federal
Reserve to pump more money into the financial system – is good. Gold thrives on bad
news; panic is its grist.
That’s why the current absence of major catalysts in the global economic system has
set gold adrift on something of a windless ocean. The absence of “obvious catalysts’
with the European Central Bank, the US Federal Reserve, the People’s Bank of China,
among others, represents a kind of holding pattern with respect to “monetary
accommodation’, an analyst said.
This policy bias has been essential for higher gold prices in the past.
In fact, according to a recent article in the Financial Times, there are real
fears that the 13-year bull run in the gold price, which saw it summit $2,000/oz from
$252/oz in 1999, is nearing an end. This is because it’s really only loose monetary
policies and inflationary worries that have supported gold these past years;
unsustainably so.
Certainly, the gold price weakness over the past 60 days has been pronounced. It
even culminated in mid-March with the price of platinum at $1 680/oz overtaking the
price of gold, which was then at $1,650/oz. US Fed chief Ben Bernanke’s refusal
earlier in March to discuss the possibility of a third round of quantitative easing even
brought selling pressure on the gold price.
Chris Hart, a senior economist at Investment Solutions, doesn’t believe it’s time to
call time on gold; not quite yet. “If anything, monetary easing is becoming more
widespead,’ he says.
The ECB’s LTRO (long-term refinancing operation), the European version of QE1 and 2,
is a case in point, he says. “There’s also a strong commitment to zero interest rates
in Europe and the European problems are far from over,’ he adds.
“There’s very little yield on offer and I would say that over a two- to three-year
horizon, you can’t see that changing for the gold price,’ says Hart.
It’s also worth turning back to recent history.
The last time the gold price corrected was in 2008, at one point falling 30% from its
then high of around $1,000/oz. During that period, the price of gold was relatively
static for a period of 18 months. If gold has been quiet, it’s really been over a nine-
month period, with the price decline not as severe as in 2008 – even if it tests the
$1,500/oz bottom range that some stockbrokers are forecasting for the metal.
According to David Davis, an analyst at SBG Securities, a third round of quantitative
easing is likely to come into play in the gold market during the second half of the
year.
“I’m forecasting an average of $1,650/oz for the gold price in the first quarter, going
up to a peak of $1,900/oz in the fourth,’ he says. There will be volatility, however.
In the longer term, Davis expects the gold price to peak in 2013 – perhaps flattening
out after then. “I think the gold market is going through another metamorphosis,’ he
says.
Self-appointed prophets of the gold price are in abundance (just turn to the plethora
of newsletters in the North American retail sector, for instance). But it was Davis who
was among the few to call the gold price’s bull run.
Davis thinks that on a global basis, gold mining costs will average at about $1
100/oz. “This will ensure a minimum gold price of between $1 750 and $1 780/oz,’
says Davis.
In the meantime, the gold price weakness comes at a time of rand strength for South
African gold stocks.
The graph shows that over the last 60 days the price of gold in dollar terms has fallen
1.87%, but the rand gold price is more than 5% weaker. This pressure is reflected in
the South African gold stock prices: shares in AngloGold Ashanti have been 6.7%
weaker over the last 30 days.
Share price declines are also evident for Gold Fields (-5.8%) and Harmony Gold (-9%)
where the exposure is entirely South African production.
– Finweek
