Gold outpaces its long-term drivers

Gold continues its spectacular rally. Indications from the Bank of Japan that it would implement further quantitative easing are assisting gold’s ascendancy. However, gold is now outpacing its
long-term drivers.

For some time now, we have said that the long-term causal fundamental drivers for investment demand in gold is liquidity (not necessarily inflation) and long-term real interest rates. At the moment, both support a higher gold price into next year (see Commodities Insight dated 11 Aug 2010). The BoJ’s announcement yesterday spells a higher gold price. Gold’s relationship with liquidity is confirmed visually (see graph) as well as empirically. We measure global liquidity as the US Fed balance sheet plus global foreign reserves holdings excluding gold. YTD, our measure of global liquidity is up 10%. The gold price is up 18% YTD.

Following gold’s latest rally there is growing divergence between the gold price and global liquidity — the gold price has been rising much faster than liquidity. This is not inconsistent with past behaviour. There are many short-term drivers of gold (such as credit risk, equities and currency moves) which account for these short-term price movements. Furthermore, the difference between liquidity and the gold price is not at an extreme level yet, and we can therefore not conclude that gold is overbought. But we are certainly more cautious with gold at these levels. Speculative length is building, and scrap gold continues to come to the market.
As mentioned in we would not be surprised to see a pull-back in gold.

Looking into 2011, we believe that global liquidity will keep rising as emerging markets specifically further expand their foreign reserve holdings. However, we
expect it to slow in 2011 and 2012 — to only 8% and 5% respectively. This growth in liquidity should support gold.

Comments

Post a Comment

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

Image
 Gold edged higher on Monday, helped by a weaker dollar and expectations that the U.S. Federal Reserve will reiterate its dovish monetary policy stance this week. Spot gold was up by 0.1% at $1,943.58 per ounce. U.S. gold futures rose 0.1% to $1,950.10 per ounce. “Gold is firm on the basis that the Fed could adopt a further dovish message with respect to average inflation targeting,” said Michael Hewson, chief market analyst at CMC Markets UK. “If you want to have a policy of average inflation targeting, you’re going to have to go into detail as to how you are going to arrive at that particular outcome.” The dollar retreated on Mond ay, bolstering gold’s appeal for investors holding other currencies, ahead of the Fed’s policy decision due on Wednesday. “If inflation forecasts remain at 2% or below, this could offer gold a tailwind as the zero-yielding metal thrives in a low-interest rate environment,” said FXTM analyst Lukman Otunuga. Market participants are also wai...
Read more

For the gold price, two outcomes are possible.

Image
For the gold price, two outcomes are possible. First is a return to or near the April low ($1,277.40). Second is a drop to a lower low, $1,240 - $1,260. Yet a third possible outcome is that the June and December lows were not a double bottom and one further drop may come. I account that the least likely, and look for a low here by the end of the week, but I'm no more'n a nacheral born durnd fool from Tennessee, so what do I know?   You'd think that an institution charged with promoting the gold industry would produce reports that at least cast the best light on gold's prospects. You'd think wrong, if you're thinking about the World Gold Council. They've been negative on gold for, oh, the last 14 years or so. Today they issued a report that contained a nugget about Chinese business using physical gold as collateral for bank credit ($40 bn worth) but they managed to tease a gloomy forecast even out of this inventive monetary use. That and bad ...
Read more

The price of gold advanced as high as $1,603.40 per ounc

Image
The gold price broke out to a new all-time high above $1,600 per ounce Monday morning, rising for the eleventh consecutive trading session. The price of gold advanced as high as $1,603.40 per ounce before backing off to trade just the $1,600 level. The yellow metal gained on the back of a surge in borrowing costs for Italy, the latest European nation to see its bond market come under heavy selling pressure. The lack of a deal to raise the $14.3 trillion debt ceiling also helped boost gold prices. The eleven-day rise in the gold price is the longest winning streak since January of 1980. The gold price delivered another noteworthy performance last week, climbing 3.2% on its way to a series of fresh record highs. With Monday’s advance, the gold price extended its monthly and year-to-date gains to 6.6% and 12.5%, respectively. Last week’s two-day Congressional testimony by Chairman Ben Bernanke on the economy and monetary policy revealed that the Fed remains open to the...
Read more