2011-10-06

Recent gold price correction has been “healthy”

The gold price stabilized near $1,640 per ounce Wednesday night despite a better than expected report on the U.S. labor market. The price of gold moved down to $1,597 in overnight trading but rebounded early this morning as the U.S. dollar turned lower against a basket of foreign currencies. The ADP employment report revealed that 91,000 private sector jobs were added in September, above the 75,000 consensus estimate among economists.

In light of the recent gold price weakness, Macquarie Capital Markets analyst Stephen Harris published a report this week discussing his outlook for the yellow metal. The gold price sell-off “has caused some speculation that gold’s bull-run is complete and that this reversal will soon continue,” Harris wrote. “We disagree. We see the recent pullback as healthy and believe a confluence of factors have combined to create the ~15% decline from its highs.”

Harris’ view that the recent gold price correction has been “healthy” was based on several factors – including the fact that sentiment had reached a “bullish extreme” in early September and a consolidation was needed; “the flight to the US dollar has meant the recent pullback been far less severe in other currencies”; investor withdrawals from the GLD and general commodity funds “have likely created another headwind”; and that an increase in gold margin requirements amplified the impact on speculators, which led to excessive selling.

Despite the aforementioned headwinds, Harris reiterated the firm’s longer-term bullish gold price outlook. “We see US short rates remaining at current levels through 2015,” he wrote, during which time the price of gold has historically risen at a 25% annual rate. Additionally, “sovereign risk and the related use of unconventional monetary policy should keep investors wary of their world’s major currencies – the euro, dollar, and yen. Concerns will ebb and flow, but these issues are not going away any time soon.”

“We see little downside” for the gold price below $1,500 per ounce, Harris added. “Doubts will continue over the future of the euro, European debt defaults, and ultimately, debt monetization.” In terms of specific gold price targets, Macquarie reiterated its 2011-year end and 2012 estimates of $2,000 and $2,500 per ounce, respectively.

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