Gold reaching $1,500 in H1:2011, short-term the metal looks set to struggle

Gold is failing to make new highs despite fairly strong physical demand in India and Asia. Investment demand is lacklustre. While we still see gold reaching $1,500 in H1:2011, short-term the metal looks set to struggle.

Empirically, we find the long-term causal drivers of gold are global liquidity and real interest rates (see Commodities Insight: Global liquidity and real interest rates support gold of 11Aug’10). We define global liquidity as the Fed’s balance sheet plus global foreign
reserve holdings (excluding gold). Gold trades around the long term trend these two variables provide. All other factors we view are short-term drivers. Lately, gold has diverged by some margin from the long-term trend provided by these causal drivers. Divergence by gold from this
long-term trend is not unusual, but the speed, size and timing of its divergence coincide with a period in which risky assets are finding support.

We find a gold price closer to $1,340 to be consistent with current global liquidity levels (refer to figure). That is, we believe gold has moved ahead of its casual drivers. This, combined with the fact that post-China’s New Year (which is at the beginning of February) physical demand may tail off, short-term upside for the metal may be capped.

We see strong technical support for the metal between $1,340 and $1,347. At the same time global liquidity is set to grow further this year which should push gold eventually higher. We further believe in 2011 low policy rates are here to stay despite the risk of higher inflation – as a result short-term real interest rates are set to remain very low. Low real interest rates
are supportive of gold. While we remain bullish on gold into 2011, we expect the metal to average only $1,370 in Q1:11 but move higher in Q2:11. We expect gold to average $1,430 this
year.

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