An anticipated reinvigoration in investment in gold is likely to lift prices through $1800 an ounce before the end of the year, Thomson Reuters GFMS said in their first update of Gold Survey 2012 released in London on Tuesday. The yellow metals closed at $1,649/oz in London last Friday.
The consultancy’s bullish expectations are premised primarily on government’s fiscal and monetary policies, particularly those enacted by the US Government.
Simply put, the gold price forecast is based on expectation of further quantitative easing or QE3 that the US Federal Reserve, it is believed, may announce. Further monetary loosening in China is also a possibility because of the ongoing slowdown in Chinese economic growth.
The survey forecast that the faith in currencies, particularly the dollar, will be undermined, stoke inflationary fears and lead to an extended period of ultra-low interest rates.
Official sector buying currently at elevated levels (270 tonnes in the first half of 2012) may also contribute to the price rally, it is pointed out.
Admitting that the demand side was rather weak with sluggish Indian and Chinese buying, the consultancy reported that jewellery fabrication in the first half fell by almost 13 per cent, chiefly on account of India where offtake dropped in the face of record local prices, a lack of conviction in future price trends and a slowing economy.
In the second half, jewellery demand is expected to grow modestly even in the event of a price rally as it would encourage investment-related buying, the survey argued.
Is the gold price forecast of Thomson Reuters GFMS realistic or too optimistic? Opinions may differ; but what is clear from the report is that the bullish factors have been overplayed and bearish factors downplayed.
It appears the price forecast of $1,800/oz before the year-end is based almost solely on the assumption or expectation or hope that the Fed will announce QE3 sooner.
This fragile assumption is fraught with risks. No doubt, gold prices surged last Friday in New York and broke above the recent trading range after Fed Chairman Ben Bernanke’s speech at the Jackson Hole symposium.
According to experts, despite the notably dovish tone of speech, the recent economic indicators have been relatively positive. Unless the August payroll data turns out to be really disappointing, the Fed is unlikely to initiate QE3 in September FOMC meeting.
In the event, gold prices will surely remain capped. If anything, rather than upside price possibilities, the downside risk to gold prices seems to be very real on current reckoning.
Physical market
Admittedly, physical demand remains soft. Imports into India have slowed down considerably. Even the start of the traditional buying season has been lacklustre as domestic prices have turned unaffordable. Drought conditions have reduced rural incomes. Chinese offtake has slowed too.
So, two of the world’s largest physical markets are not likely to show any signs of growth anytime soon. So, fundamentally the gold market has no case for a bull run. Europe continues to be in a bad shape with unresolved sovereign debt crisis.
The dollar is most likely to remain firm relative to other currencies such as the euro.
What about speculator and investor interest? The most recent CFTC data showed that gold’s non-commercial (speculative) positions have grown to the highest level since early March of this year. It must, however, be remembered that these speculative positions were built in anticipation of QE3 in August which did not materialise.
The less-committed non-commercials will exit gold as soon as they realise their speculative expectations may not come through soon.
One of the most important aspects usually glossed over by the gold bulls is that gold prices have really struggled to stay afloat in recent months despite supportive macroeconomic environment, geopolitical concerns and inflation expectations.
When premised less on fundamentals and more on extraneous or non-fundamental factors including government policy, the price forecast of any commodity runs the risk of going wrong.
By their very nature, commodity markets are fickle; and so is the price forecast that is based on expectations that are themselves less-realistic.
For all the various pulls and pressures, gold prices may eventually test the $1,800/oz levels but are unlikely to stay anywhere close to that level for long unless of course the physical market picks up quickly, the dollar depreciates rapidlyand investors return to gold in hordes.