Gold investors wary in May
May was an interesting month for gold with the shiniest of commodities demonstrating to the market that it is just as susceptible as its cousins to a sell-off when market conditions change.
Gold reached a high of US$1,575 per ounce at the start of May only to quickly fall off almost seven per cent over the period of three trading days.
SOURCE: Australian Securities Exchange
A subsequent rebound since then didn’t really do much to mitigate market ambiguity concerning the future direction the gold price looks like taking.
The early May price correction, for want of a better term, saw market attitudes towards gold develop a more negative subtext that were slowly appeased as the month drew on.
“The broad-based commodity correction was triggered notably by the implications for asset prices of the end of QE2 in the US and the broader trend of monetary tightening globally, as well as weaker economic data,” Commodity Markets Strategy Group of corporate and investing banking group BNP Parabis said in a recent Metals Market Comment.
“In addition, the US dollar strengthened significantly vs. the Euro at the beginning of May as the Greek debt crisis deepened.
“In our view, these factors will have a short-term impact on the gold price.
“While a decline in global liquidity is without doubt a negative factor for the gold price, the evolution of real rates may be a better gauge when assessing the potential end of the gold price rally.”
The May 2011 issue of ABN AMBRO’s Metal Monthly investment research newsletter complied by VM Group suggested the fall of the gold price in early May could also be attributed to profit taking.
VM Group advocated this could have been caused through market fears that the gold price had actually reached its peak.
“Speculative activity on Comex declined by 14.6% in the three-week period ending 10 May, to 26 Moz (million ounces), led by long liquidation rather than a rise shorts betting against the gold price,” VM Group said.
“ETF investment also declined, with the SPDR product down 1.2 Moz in the three-week period ending 13 May, while non-US-based products added 0.2 Moz.”
VM Group was also not entirely convinced about the perceived strengthening of the US dollar citing it as, ‘”illusory” in that it is only looking healthy when compared to the euro.
“The choice between Eurozone fiscal crises and US versions of the same is rather like choosing between death by fire or death by water,” VM Group said.
“With the end of QE2 in June, the US economy will have to put on much greater speed than it has currently shown itself able to do – or else.”
VM Group identified “or else” to be, in its opinion, a much more likely outcome.
“The US Federal Reserve will be forced to come up with new tricks to help keep the fragile recovery from running into the sands,” VM Group continued.
“It may not be called QE3, but that’s what it will be. Gold may trade sideways in the short-term, as investors are confused about what comes next.
“Longer term however the only direction is up – unless there is some surprisingly good macroeconomic data out of the US in the next few months.”
The combination of expected low interest rates to be maintained by the US Federal Reserve to remain where they are, combined with expectations for inflation has BNP Parabis anticipating real rates to remain negative this year.
“This naturally favours investment in real assets over fixed income instruments,” BNP Parabis said.
“Furthermore, the Eurozone fiscal crisis (and ongoing concerns about the US situation) should continue to support gold safe haven demand for the time being.”
Investor interest may have waned somewhat but the purchase of physical gold has remained relatively strong around the world, in particular Asia.
BNP Parabis pointed to data from the World Gold Council, which highlighted an up-swell in bar and coin demand in the first quarter of this year.
Not surprisingly China and India were leading the pack with Turkey also a major contributor.
Other countries bankrolling the rise in physical gold purchase included Switzerland and Germany.
“Turkish physical gold demand was largely driven by the decline in the gold price in January/February,” PNB Parabis noted.
“Gold consumption in India and China tends to be less sensitive to price variations. Rather, it is more influenced by positive price expectations and inflationary concerns.”
Mexico is another country that has been on the hunt for purchases to augment its gold reserves in this time, buying some 93.33 tonnes of gold in the period February-March 2011.
This resulted in Mexico’s gold holdings as a fraction of total reserves rise from 0.2% to 3%.
“What is of significance here of course is not necessarily the volume of gold bought, at more than 3 Moz, but the trend it signals,” VM Group noted.
“Central banks have been net purchasers to the tune of 3.8 Moz in Q1 2011. In 2010, and excluding purchases by the Bank of International Settlements – but including IMF gold sales – central banks were net purchasers of just 0.5 Moz of gold.”
Whether it is banks or individuals purchasing or investing one thing remains constant and that is the scrutiny the price of gold continues to receive.
BNP Parabis says it sees the price trend to continue “moderately higher, for the remainder of 2011 with the gold price averaging around the US$1,500 per ounce mark going on to peak at US$1,600 sometime in 2012.
“We retain our gold price forecast first issued on 17 November 2010,” PNB Parabis said.
“Although developments in the gold market so far have been in line with our central scenario, we remain mindful of the potential risks.
“Our economists expect the Fed to start hiking interest rates in mid-2012. Inflation is another key issue when assessing the direction of the gold price.
“We expect inflation to peak this year in the major economies, notably as base effects from increases in commodity prices fade in the second half of the year.”