Oct 16 2012

What's holding back gold?

What's holding back gold?
Gold was supposed to be off to the races after Ben Bernanke announced that the Federal Reserve will unleash a third version of quantitative easing and continue supporting until U.S. unemployment figures improved.

This was supposed to be the cue for gold to race towards USD2,000 per troy ounce.

But after an initial burst of euphoria, the market seems to have cooled down.

"We suspect that further gains for gold will require a new catalyst as the US dollar recovers more ground and inflation expectations drop back," said Julian Jessop, head of commodity research at Capital Economics, in a note to clients.

"But that catalyst is likely to come soon in the form of a renewed escalation of the crisis in the euro-zone and a revival of safe haven demand."

Gold has risen 11.4% year-to-date, which is not as impressive given that it is supposed to be safe haven at a time of global economic uncertainty in all three major economic blocs: The United States, European Union and BRIC nations.

In contrast, the Dubai Financial Market and Egypt SE index have performed much better than the yellow metal.

Gold briefly crossed USD1,800 per troy ounce in early October, but appears to have lost steam.

"Gold has found some support from a pick up in gold buying in India in the weeks preceding the festival of Diwali," notes BarCap in a recent report. "However, demand here remains sensitive to local prices, and gold in INR terms has edged higher over the past week as the rupee has again weakened against the USD."

Meanwhile, Chinese gold imports from Hong Kong fell by a third in August, although they are still up a quarter year-on-year.

China's gold production also continues to grow, with gold output up 10.3% y/y for the year to August at 249.7 tonnes; growth of 41.4 tonnes in August kept China on track to retain the title of largest gold producer for the sixth straight year and at record levels for the country, BarCap points out.

Deutsche Bank thinks that weak Chinese activity, the United States' fiscal cliff and the continued Euro crisis will demand more action from central bank which will be beneficial for gold.

"We would also highlight that supply constraints are becoming a larger issue for the gold mining industry, particularly given the labour disruptions which have been growing in South Africa," says Michael Lewis, analyst at Deutsche Bank.

"As of the end of Q3 2012, the country had closed down approximately 39%, including all of AngloGold Ashanti's South African gold mines and several Gold Fields mines."

The German bank still expects prices to average USD1,850/oz in the fourth quarter of the year and then exceed USD2,000/oz in the first half of 2013.

What's hurting gold is the renewed interest in the American dollar. With Japan and the EU sliding back into a recession, the U.S. dollar has strengthened, which often signals weakness in gold.

Still, there are plenty of catalysts for gold to rally.

"Top of our list is a renewed escalation of the crisis in the euro-zone, including the exit of one or more of the smaller peripheral countries," says CE's Jessop.

"There have already been periods in the recent past when gold has risen while the dollar has been firm. In particular, the dollar price of gold rose by more than 10% in the first five months of 2010, despite a 7% appreciation in the value of the dollar against other major currencies. Perhaps significantly, this was when the markets first began to focus on the problems in Greece."

Another key catalyst could come from the U.S. especially if the American policymakers are unable to avoid the fiscal cliff.

Most analysts expect gold to rally eventually.

"We remain positive on gold's outlook but expect gains to be moderated compared with the run up in prices ahead of the QE3 announcement given the accelerated growth in investment demand," notes BarCap.

Similarly, Capital Economics also continues to believe gold will march upwards.

"The upshot is that we remain comfortable with our long-held view that the price of gold will climb to new record highs of around $2,000 per ounce in the coming months."

© alifarabia.com 2012

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