Short term price outlook for gold and silver

The VM Group/ABN Amro's latest metals report takes a fairly conservative view on the prospects for gold and silver prices in the short to medium term.

LONDON - 

London's VM Group of metals research analysts has released its latest metals review on behalf of ABN Amro Bank and, as usual, it makes interesting reading, although some analysts may well differ on some of the opinions.  Given it was VM Group's Matthew Turner who found the report on the BIS gold swaps - the subject of much speculation over the past couple of weeks -  buried on page 171 in its Annual Report, the depth of the group's research should be praised, although its broad ranging conclusions on the range in which gold is likely to trade over the next month - $1,150 - $1,260 seems wide enough to encompass most probable eventualities!

The report notes for gold that it may have lost a bit of its shine at the start of H2, but the analysts do not envisage this will last and are broadly positive in the medium term. "Concerns over the global economy are not far from the surface" it states.  "The US continues to disclose an equal amount of both positive and negative economic data, while the eurozone debt crisis is far from over. Indeed the gold price might very well get a boost once the ‘stress tests' on eurozone banks are released on 23 July. Should it not, then we expect a further correction in the immediate term. But with near zero interest rates offering up only risky equities or commodities as a means for profitable investment, then gold still looks well placed."

BIS swaps apart VM notes that the IMF continues to sell gold, with 15.25t of gold sold in May, up from the 14.4t sold in April. The sale was in line with expectations that the IMF will steadily eke out its committed gold sales by the end of the fiscal year in April 2011. Indeed May's figure suggests that sales could be complete by the end of this year or by January 2011. It points out that the Russian central bank (which publishes details of its reserve holdings) remained the largest buyer of gold, with 22.46t bought in May - taking its reserves to 703t. It was the largest acquisition this year and brings the Russian central bank's gold purchases to 53.87t in the first five months of 2010.

Of course China, which tends to release such information only as and when it feels it is politically or economically expedient to do so, may also have been purchasing gold from internal sources which just prevents gold from the world's current largest gold miner appearing on the market.

VM Group reckons the correction in the gold price this month was well signalled with the Comex net long position near record levels for much of June. The net long non-commercial position stood at 24.47 Moz at the end of June, up more than 2 Moz on the start of the month and its highest since December 2009 when the gold price was around $1,100/oz, but the overall net long position had inched down to almost 32 Moz. The net long commercial position however fell to 20.9 Moz in the week ending 6 July and the total net long position to 27.4 Moz. In contrast, ETFs have supported the price, with total holdings rising 2.45 Moz in June and another approx. 0.25 Moz by 9 July. 

The report notes that sales of US American Eagle gold bullion coins are also high, with sales reaching 151,500 oz in June, the second highest volume this year after May's record of 190,000 oz. These sales highlight investors' appetite for physical gold, despite the high price.

To an extent this is not the case in some other major physical markets, though.  In India, the world's largest gold importer, imports have fallen sharply in response to prices, with recycling of gold scrap meeting the deficit. Similarly for Turkey, gold imports are very low by historical standards, at just 300 kg in June from zero in May and 800 kg in April. In the period prior to the collapse of Lehman Brothers, note the analysts, monthly Turkish gold imports were measured in tonnes!

As for the BIS gold swap, the wider significance to this unusual event is seen as having little impact on the physical market.  VM believes that the transaction mechanism involved the depositing of gold, by the national central bank of the commercial banks who are supposed to have entered the swap agreement, to the BIS in return for the BIS to make available paper currency to the commercial banks. The comment here is that the  transaction does however reveal the fragility of the banking sector, with central banks perhaps reluctant to be seen assisting commercial banks in the same way as in Q4 2008 and 2009. It is also seen as quite bullish for gold considering how governments have mobilised gold to indirectly prop up commercial banks as well as it might slow the rate of official sector gold sales under the CBGA. "After all" notes the report "which central bank will want to be seen ridding itself of this asset?"

SILVER

As for silver, the VM Group is even more positive.  While silver more or less tracks gold over the traditionally quiet Q3 period, the consultancy expects prices to remain firm and possibly advance going into Q4. It puts the medium to longer term prospects in industrial demand for silver as extremely positive and would not be surprised to see the silver price test $20/oz by H1 2011.  Many would consider this a conservative assessment, particularly if gold does revert to its relatively strong upwards path in the fourth quarter of this year as many feel it will.

However silver is also more dependent on industrial growth than gold and thus advances in price could be mitigated if the global economic recovery is reckoned to have stalled.

Indeed, VM Group notes that silver's relatively lacklustre performance so far this year - despite it being talked up substantially by the silver bulls - is due to industrial demand remaining weak and thus the price has failed to deliver on earlier high hopes and has slightly underperformed gold; the gold:silver ratio nudged up to 66-67 in early July, from less than 65 on 23 June. 

VM Group does however point to eastern demand as potentially being very supportive for the price.  Although weak, demand has been improving in H1 2010 the report notes. Chinese imports of silver, for example, have risen year-on-year in each month since November 2009, although the figures are skewed because of the deep recession that year. May's imports were 482.9t, up 72% on the same month in 2009, but importantly are also up on the same month in 2008 - before the full extent of the financial crisis became apparent.  China's imports serve both industrial and jewellery demand and ought to be price supportive.

The same holds true for Indian silver imports, which in US dollar terms were $309.8m in June 2010, up 854% on the year, while in the first six months of 2010 they are up 579%, at $1.69bn. India's appetite for silver has been boosted because gold has become too expensive at current prices. But should the gold price fall then we expect much of this silver will be cashed in for gold.

For a copy of the full report click on www.virtualmetals.co.uk

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