Gold bulls got hold of the market towards the latter part of last week, conquering the hitherto elusive Mt $1,400 with relative ease on Thursday, May 30, 2013.
The yellow metal remained above that threshold for a good 36 hours or so, but then, a few hours before the close of the markets for the week, the so-called bulls decided to cash out whatever gains they had made in the past day or so.
There are two ways to look at the drama that unfolded in the gold mart over the past two sessions. One would suggest that, with gold price decisively crossing $1,400 (it was, at one point, trading at just below $1,420), there is no way the gold rally can be considered over. This phase will, in retrospective, be seen as a golden buying opportunity, so to speak.
But the other way of looking at the goings-on would suggest that with gold price not being able to hold on to its own above the psychological $1,400-mark, there is every reason to believe that the tentative rally seen towards the end of last week was just that – tentative.
While there will be no dearth of experts arguing either story, the fact remains that gold price moved erratically over Thursday and Friday in anticipation that weak US economic data, announced on Friday, would force the US Federal Reserve’s hand and it would continue printing money (QE3 uninterrupted), keeping the money market machinery well lubricated with fresh dollars.
If that were to happen (a continuation of QE 3 for a substantially longer period), it would indeed push gold above not just $1,400 per troy ounce, but also $1,500 and beyond.
Problem is, whatever the gold buffs might tell you, they’re not really putting their money where their mouth is, and seem only too eager to cash out any nominal gains they’ve been making of late. What that means is, in effect, gold is headed lower, at least in the short term.
No wonder Bank of America-Merrill Lynch (BofA-ML) last week downgraded its gold and silver price forecasts for the second time in less than two months.
“In mid-April, we removed our $2,000/oz gold target, highlighting at the same time that a lack of investment buying could push gold to $1,200/oz in the coming weeks,” it noted in a report published on May 28, a couple of days before last week’s precious metals theatrics.
“We are now bringing our period average forecasts in line with the target and see gold average $1,478/oz this year, 12 per cent below previous expectations. We also believe that the fundamental backdrop for silver remains weak. While spikes on the back of technical short-covering are possible, silver looks set to average $24.4/oz, 25 per cent less than our previous forecast, and could fall below $20/oz in the coming months,” it noted.
The Dubai-based Emirates NBD bank too isn’t very hopeful of a near-term rally in gold prices, given that the world’s largest gold consumer, India, is trying very hard to make its citizens go on a no-gold diet. “The gold price finished an interesting trading week more or less exactly where it started,” wrote Gerhard Schubert, Head of Commodities, Wealth Management, at the bank (yes, his title seems to have changed recently from Head of Precious Metals, so congratulations on the move, Mr Schubert).
“It has been another week of consolidation, but I do not want to hide my disappointment that the market could not hold on to the gains, made last Thursday and during the early Friday morning trading. The market tested and failed, again, to break the $1,420 level, and could not even hold on to a weekly close above the $1,400-mark,” he laments in his latest weekly precious metals report.
While the decline in March-April had led to a shortage of gold coins and bullion bars in Dubai, through which one-third of the world’s gold passes, that shortage has now eased, and the premiums on investment bars has supposedly narrowed, according to Schubert.
“The physical markets, and therefore also the premiums, have calmed down and the refineries are able to clear some of their backlog orders. Premiums in Dubai for 995 finesse Dubai Good Delivery (DGD) kilo bars have gone down, and the supply situation has been pretty much normalised. Furthermore, premiums for markets in Turkey and India have also been greatly reduced during the course of last week,” he pointed out.
“The coupling of higher gold prices and the depreciation of the Indian rupee ensured that volumes into India ‘fell off the cliff’. The new measures from the Indian government, released and intended to curb the gold imports seem to have worked, at least in the short term. Akshaya Tritiya [another Indian festival of gobbling up gold] is over, and the leaner time for the physical off-take in India is upon us,” believes Schubert.
“Having said that, an acclimatisation period towards the new restrictions is likely and physical buying might resume, once ways to cope with the recent changes have been successfully established. The International Indian Gold Convention, which takes place in Jaipur between August 16 and 18, will provide a very appropriate forum to take the ‘temperature’ of this, still, largest gold import market.”
In addition, as Schubert points out, it’s officially the summer season, traditionally a lean period for gold sales. “Overall, we should not forget that the second quarter is traditionally the weak quarter for gold prices and for physical demand, before hopefully, prices stabilise and move higher during the remainder of the year.”
The Middle East still provides the proverbial silver-lining to an otherwise dark cloud, experts reckon. The BofA-ML report insists that, “[d]espite the rather gloomy picture, it is worth noting that some demand strength persists, which may ultimately prevent a complete meltdown in gold and silver prices. To pick just two indicators, CME gold inventories have fallen partially because traders have removed metal, refined and then shipped to countries with healthier physical markets like the Middle East. Meanwhile, sales of US Silver Eagle coins, which are often picked up by retail buyers, have been running at a record pace seasonally. Of course, it is also worth noting that shorts have increased meaningfully, raising the risk of short technical spikes.”
In the end, however, as the BofA-ML report concludes, the gold rally is pausing, but it is not broken. In fact, analysts at the bank stick their necks out and maintain that gold could still, realistically, breach $2,000/oz by 2016 if certain conditions were met.
“In our view, the gold bull market is pausing. However, we believe the structural rally is not broken, and we see several scenarios that could push prices higher again. To pick just one, more affluent emerging markets could increase metal purchases to an extent that gold could trade at $2,000/oz, even if investors bought only a third of the gold they purchased in 2012,” the report states.
“Looking further out, we see further potential upside to gold prices. Our models show, for instance, that the importance of investors as marginal buyers could subside gradually. This trend is heavily influenced by rising affluence in emerging markets, which should result in more spending on luxury goods like jewellery. In fact, we estimate that jewellery demand may become so pronounced by 2016 that prices could trade above $1,500/oz even if investors were net sellers. Looking at sensitivities from a different angle, we estimate investors would need to buy merely 600t of gold to sustain prices at $2,000/oz by 2016, compared to non-commercial purchases of 1,798t in 2012.”
So while $2,000/oz is a theoretical possibility, don’t hold your breath (at least not yet). It’s a long way away, and like a long Bollywood blockbuster, a lot of drama and song-dance sequences are yet to unfold, taking gold lower still, before that 2016 climax that will decide the battle between the bears and the bulls.
