GOLD ANALYSIS

Lack of trust could push gold higher, but fundamentals precarious

While the distrust factor could continue to push gold higher into 2011, Australian group RCR feels weak fundamentals could see prices dissipate later next year.

Author: Lawrence Williams
Posted: Tuesday , 05 Oct 2010

LONDON - 

In Australian research organisation, Resource Capital Research's (RCR) September quarter review of the gold sector, the group notes that the yellow metal has continued to set new records, recently breaking through the US$1,300/ounce level. Overall, the gold price is up around 10% since the start of the quarter, and in the last twelve months it is up by over 30%.

Since the start of 2008 RCR reckons that gold has stood head and shoulders above other major asset classes, appreciating by 55% while equity markets, the oil price, copper price (to name just a few) are still in negative territory or barely positive over that period.

So how does one go about predicting the gold price from here? In this latest Review, RCR argues that it is no longer about analysing gold's fundamentals, but more about analysing market psychology, the almost total lack of trust in most asset classes, and the predominance of a ‘crisis mentality'.

At the moment it seems, says RCR, that gold (and other precious metals), as safe havens, are virtually the only investment vehicles that can be trusted.  If other asset classes start to regain the market's trust, the need for a safe haven is reduced. In this scenario gold's fundamentals look precarious. That will happen in time, and the organisation believes gold will eventually come off and re-test US$1,000/ounce.

However, it is hard to bet on this happening in the short-medium term, particularly with the US dollar under renewed pressure and sovereign debt fears that won't dissipate for some while. So RCR feels that gold could continue to set new records in the near term.

Thus the expectation for the balance of calendar 2010 is a pretty conservative US$1,325/ounce - conservative given the price is back up at that level this morning in its latest surge.

Into 2011, Though, RCR believes that although higher prices could prevail in the first half, eventually gold's unique safe haven appeal will start to dissipate - their guess (and they point out it is only a guess!) - in the second half of 2011.

To contact RCR and get a copy of the report click on www.rcresearch.com.au