SWISS bank UBS published a note on March 6 questioning whether the dollar gold price had run too hard, too soon.
At the time the market had a positive bias towards possible interest rate easing, since dispelled by Federal Reserve chairman Jerome Powell who said inflation had not been fully tamed; in fact, far from it.
Said UBS: “Some consolidation would be healthy for the market, in our view, though we expect investors to maintain a buy-the-dip mindset”. It added that positive gold sentiment and “still limited positioning” by money managers “skewed to the upside overall”.
So it has proved. Since that report gold reached an all-time high price of $2,195.15/oz before retracing in recent days back to about $2,158/oz where it was in early March. Over the last month, the metal is still 7% higher.
For South African gold miners, the dollar price gains have been catalytic. In rand terms the price received by the likes of Harmony, DRDGold and Pan African Resources is at an all time high of over R1.3m per kilogram.
Shares have responded accordingly, especially Harmony Gold – up 20% year-to-date and taking gains over 12 months to a staggering 95%. The company is worth more than R33bn than Sibanye-Stillwater.
Capturing the ambivalence regarding the headiness of the gold market is a note from Nedbank Securities analyst Arnold van Graan who comments that overall he’d be a seller of gold shares … just about.
Geopolitical uncertainty was largely driving the metal, he says. Given this assumption, it was hard to call whether gold could be trusted to keep these levels or whether it was now in overbought territory. There’s no avoiding the tone of ambivalence.
“It’s a tough call, yes, but the risk-reward ratio is out of kilter, with downside risk mounting,” said Van Graan. “The risk of a known unknown pushing gold higher concerns us though, given the global geopolitical and economic backdrop.
“We still stick to our short gold call. We may be wrong on the timing, but we believe ‘no one has gone bankrupt taking profits'”.
Risks to this view is the possibility of a Fed rate cut later this year. In such a scenario $2,500/oz is a possibility, according to JP Morgan Cazenove in an interview with Bloomberg News earlier this month.
There’s also central bank purchases of gold, especially China. It was the largest accumulator of gold last year buying 224 tons. It dipped into the market again this year buying just over 43 tons, according to World Gold Council data.
Is Van Graan being overly cautious? Record gold prices are nothing to sniff at but with a 59% chance of a rate cut in June, according to CME FedWatch recently cited by Reuters and renewed demand via ETFs there is the possibility of gold running hard again. According to UBS analyst Giovanni Staunovo, “a new record high of $2,250/oz at the end of the year” was not beyond reach.
