Should gold prices be higher?
Medium term, the fundamentals for gold remain strong but some of the short term moves seem odd
Posted: Wednesday , 23 Nov 2011
The US government's announcement Monday that it's bi-partisan, deficit reduction "Super" committee had failed to meet its target of $1.2 trillion in deficit cuts helped push confidence in Washington and stocks in the US lower.
This move is understandable given the pre-existing concerns about the country's ability to repay its debt as well as the poor state of the debt situation in Europe.
But, at the same time, the dollar strengthened and gold fell. Analysts attributed the dollar rally to a funds flowing from risk-averse investors into the perceived safety of the dollar - a flow that many gold commentators view as bizarre, given the health of the US economy.
But, it does, as Deutsche Bank points out show that "gold has become more vulnerable to environments where the US dollar is strengthening,"
Despite this, the bank believes that public and private sector demand for the precious metal is likely to remain high as long as real interest rates remain negative and the risk premium on US equities remains high.
Speaking on Mineweb.com's Gold Weekly Podcast, precious metals strategist, Matthew Turner agrees with Deutsche Bank saying, "if you look at the daily market movements, it seems to respond more like copper or like equities as a risk asset than as a hedge against these things."
But, he says, while there is no obvious reason why this is the case, he says, "The gold price rose in July-August which was based upon first the US debt crisis and then hopes of the Federal Reserve announcing QE3. It didn't materialise - the Federal Reserve didn't announce QE3 and so that kind of inflationary bubble if you like, has dissipated and gold has come down."
That is not to say, however, that the likelihood of further inflation across the world is no longer high. As Turner points out, "These issues are not just big issues, they're historical global issues and so they can almost swamp the gold market.
"The Eurozone crisis has been with us now for two or three years, but it's really flared up in the last few weeks and it's not outlandish now to talk about the possibility of countries leaving the euro and so on... one solution for the crisis would be for the ECB to print a lot more money - that would be very gold bullish. The ECB in a way is the last central bank that hasn't gone down that route. But of course as you know, there's big opposition not only within the ECB but also from the German government which is most important in Europe".
This opposition he says means that the market is stuck between the possibility of a really inflationary, gold friendly policy and perhaps a deflationary gold unfriendly policy "and it kind of shifts its position, according to what statements you get from ECB officials, German government officials, Italian officials and so on."
The reason for this, is that, while the US, has the "luxury" of being able to kick the can, a little bit further down the road before they need to face their debts, the eurozone is coming to the end of the road.
The gold price is already high - 24% higher in dollars year on year Turner says, "Only oil, of almost any assets and I'm talking not just commodities but share prices and so on, is anywhere near that".
But, he adds, while a clear forecast in the short term it's not possible because the market is nervous and there is the possibility of things like book squaring as the end of the year approaches, "medium term, the solution to the world's debt problems will probably be inflationary and that's good for gold investment."