2012-03-30

CPM Group - price of gold will not surpass its all-time high in the foreseeable future

The gold price dipped $5.06, or 0.3%, to $1,657.89 per ounce Thursday morning despite two worse than expected U.S. economic reports.  The price of gold oscillated around $1,660 in overnight trading and later showed a muted reaction to data on weekly jobless claims and GDP.  Silver dropped in concert with the gold price, by 0.4% to $31.97 per ounce, while the U.S. Dollar Index rose 0.1% to 79.21.

One firm that is rather cautious on the prospects for the yellow metal is CPM Group, an independent commodities research and investment banking company.  In its recently published “Gold Yearbook 2012,” the firm argued that the price of gold will not surpass its all-time high in the foreseeable future.  Jeff Christian, Founder and Managing Director of CPM Group, wrote that “We are looking for the (gold) price to stay above $1,500 this year and above $1,400 over the next few years.

CPM attributed its stance to a less supportive environment for gold prices.  Although the firm expects economic uncertainty to continue to support the yellow metal, it contended that concerns of another global financial crisis have been substantially reduced.  In addition, CPM cited a decline in the growth rate of central bank purchases of gold – which fell from 15.3 million ounces in 2010 to 12.7 million in 2011.
In contrast to CPM Group, Goldman Sachs presented a more bullish forecast for the price of gold.  The firm reiterated its three, six, and 12-month gold price targets of $1,785, $1,840, and $1,940 per ounce, respectively.

“While gold prices have returned to trading with a strong inverse correlation to US real rates since late December, at sub-$1,700/toz they remain below the level implied by the current 10-year TIPS (treasury Inflation-Protected Securities) yields,” analysts at Goldman Sachs wrote in their report.  “We believe that despite last fall’s decline in 10-year TIPS yield to -15 bp (basis points), the gold market may have been expecting that real rates would soon be rising along with improving economic growth, leading to a sharp decline in net speculative length in gold futures.”

“Accordingly, a simple benchmarking of real rates to US consensus growth expectations suggested a level of +40 bp by year end,” the firm added.  “In our modeling of gold prices to real rates, this higher level of real rates would be consistent with the current trading range of gold prices.”

Looking ahead, Goldman Sachs noted that “Our US economists forecast subdued growth and further easing by the Fed in 2012, which should push the market’s expectations of real rates back down near 0 bp and gold prices back to our 6-mo forecast of $1,840/toz. Consequently, we continue to recommend a long gold position.”

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