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Gold: Game changer

The American dollar may not be able to peg back gold's rise much longer, according to analysts. With two key political events coming to a head, gold might be poised for a break through moment.
First, is the threat of a break up of the euro, or at least the departure of Greece from the Eurozone. The second is the so-called 'fiscal cliff' in the United States, which means George Bush-era tax cuts would not be renewed hurting an already fragile economy.
"This should all be positive for the price of gold, an asset whose value is not dependent on the creditworthiness of any particular government or financial institution," says Julian Jessop, chief global economist at Capital Economics, who has stuck to his forecast of gold prices hitting USD2,000 per troy ounce before the end of the year.

Capital Economics often makes bold and contrarian bets, and - to their credit - usually get it right. Earlier in the year, it was calling for a fall in Brent prices from their lofty heights of USD120 per barrel earlier than other analysts and was spot on with its prediction.

The research house is one of the most bearish on crude prices. It is also one of the most bearish on gold, expecting the price to surge nearly USD400 within five months.

Mr. Jessop is not the only one.
Peter Schiff of Euro Pacific Capital says that after spending the previous fall and winter testing new nominal highs above $1800, future investors may come to view spring and summer 2012 as the opportunity of the decade. Gold has shown its strength and retreated. While most investors will take that as a signal that the market has topped, some will take advantage of the general trepidation to add to their positions at hundreds of dollars off the highs.

"While I think gold is a bargain at $1900 considering today's circumstances, the market phobia of a price collapse is allowing us to buy at well under established highs. It's as if you already wanted to go swimming, but you found out when you got there that the pool was heated," says Mr. Schiff.

Unfortunately, there is no public validation for those who have proved the gold doubters wrong, says Mr. Schiff. "A couple of years ago, I predicted gold would cross $1500 and even my own staff thought the call was too risky, too extreme. But I knew then, as I know now, that at the end of the day the gold price is not a mystery - it's a proxy for dollar weakness."
The World Gold Council, which promotes gold as an asset class, believes the yellow metal can help solve the Euro crisis.
A gold backed bond or the collateralisation of gold for a supranational fund could, we believe, be constructed within existing EU agreements and in such a way as to maintain the integrity of the gold market.
"There are challenges, but we believe that they are surmountable and no greater than the challenges posed by the other "solutions" currently being considered in Europe," notes the WGC. "Within an appropriate structure, a gold-backed bond could be a credible and attractive proposal which could reduce sovereign borrowing costs to sustainable levels and only serves to reaffirm gold's credentials as a unique and highly compelling reserve asset."
The Eurozone's gold reserves currently stand at almost 10,000 tonnes. While direct sale of gold is not legal, golf can be used a way to unlock cheap financing for Eurozone member states.

"However, gold can provide a solution which would unlock a cheaper form of financing for Eurozone member states. At national level, Eurozone Member States might reduce the rate at which they issue debt by using a portion of their gold reserves as collateral," said WGC.
The WGC comments echoes a report by the European Commission late last year, which argues that if Europe was to move towards fiscal integration and issue a common euro bond, the credit quality of that bond could be enhanced by collateralising it with gold and other assets.

DOLLAR CLIPPING GOLD'S WINGS
Indeed, the dollar has really cramped gold's style over the past decade. While the conditions are ideal for a gold rally, the strength of the American dollar against the more beleaguered euro has reined in gold prices.

"For now, the precious metal is losing out to other safe havens, notably the US dollar and high-grade government bonds. But this is unlikely to last as the crisis in Europe escalates," say CE's Mr. Jessop. "There is no reason in principle why the dollar cannot be one of the strongest of the paper (or "fiat") currencies, and still under-perform gold. Indeed, this appears to us to be the most likely outcome in the event of the break-up of the euro-zone."

Something has changed over the past couple of weeks. After languishing in the mid USD$1500s for months, gold crossed USD1,600 last week, but they have sputtered back below that level.

"Gold prices have once again surrendered the $1600/oz milestone following the lack of further monetary stimulus from the Fed and market disappointment after the ECB press conference," notes Barclays Capital. "Market focus will turn to the non-farm payrolls data, but our economists believe the September FOMC meeting is likely to be a near-term decision point that could drive prices higher. The physical market remains soft, despite which ETP holdings remain relatively resilient."

The bank has a price target of USD1720 by the end of the year.

Meanwhile, French bank Societe Generale believes that while gold might rally, it will not be sustainable.

"We would be looking to take profits towards year end and into early 2013," it said in a report.

But for most analysts the gold's rise is virtually inevitable.

"There has been a lack of catalysts driving gold prices," said it is Deutsche Bank analyst Michael Lewis. "However, gold's performance can be considered resilient in the face of U.S. dollar strength and investor liquidation. We believe negative real interest rates will underpin gold returns, but, we expect resumption in U.S. dollar weakness and further central bank buying is required to drive returns higher."

The WGC also believes the flight to the US dollar as a safe-haven in the first half of 2012 could be reversed.

The US debt ceiling debate in Q3 and federal elections in November, followed by the necessity to confront a US$1.3tn budget deficit will prove challenging to the US dollar. With most currencies under pressure in one form or another, gold is likely to provide a hedging mechanism for investors, says the WGC.

While gold has been aching to break through its current price band, it may take a while for the yellow metal to reach breakout point.

"We need to see the USD1,640 level gets cleared in order to start buying this market, as it would show a significant increase in bullish momentum," said Christopher Lewis, technical analyst at FX Empire. We can see the same thing about the USD1,500 level which is below and acting as support. If it gets violated, this would be a massively bearish sign as it would show, for our money at least, a trend change. However, we also see support at the USD1,540 level, and would buy supportive action in that area knowing that the massive support level all the way down to USD1,500 is still intact.

CONCLUSION
Gold bugs have been calling for a rally for months, only to have their hopes dashed.

But it's important to remember the flip side? What if the U.S. avoids the fiscal cliff - this is not inconceivable as both the Republican and Democrat parties don't want to be labelled as the folks that brought the U.S. fiscal house crashing down.

Also, the European Central Bank Mario Draghi has promised that he would all that it takes to save the euro. Those twin reversals, which are not impossible, could well bring gold crashing down.

© alifarabia.com 2012

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