2010-09-16

Gold pushing towards USD 1,300 per oz

We’ve held the view that gold would breach $1,300 in Q4:10 since May (see Commodities Daily of 12 May and Commodities Insight of 11 Aug’10). At that time, our view was based on investment demand and an expectation that physical gold demand would pick up in Q4:10. Since August, gold demand from the physical market has been rising as seasonal jewellery demand picked up.

Apart from rising global liquidity and low real interest rates, one of the main factors driving our view for gold, and the timing thereof, has always been the behavior in the physical gold market. When the gold price hit new highs on 21 June, resistance from the physical market was strong. Refer to our Standard Bank Gold Physical Flow Index (GFPI) in the adjacent figure. Our index tracks physical flows in the gold market. An index value greater than zero confirms buying activity in the physical market; the higher the value, the greater the buying momentum. An index value less than zero confirms selling in the physical market.

Between April and July, physical demand was low and gold selling (including scrap) high. Now however, with seasonal demand picking up, buying interest is much stronger, and this is supporting higher prices rather than offering resistance. We expect physical
demand to remain strong in Q4. Apart from strong physical demand for gold, we believe that other macroeconomic factors have become more positive for gold. We see the long-term causal fundamental drivers for investment demand in gold as liquidity and long-term real interest rates. Both support a higher gold price.

The yield on the 10-year US inflation linked bond is well below 1%, implying that the market expects real interest rates to average a mere 1% over the next 10 years. Back in June, the same yield traded around 1.3%. A lower implied real yield favours gold investment.

We maintain our view that gold will breach $1,300 in Q4;10.

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