Where next for gold: what the experts say

Gold has been under pressure recently, but although the downward move has intensified spectacularly in recent days, it’s nothing new, say experts, and very possibly represents a buying opportunity.

Below we show a snapshot of expert opinions on the yellow metal.

Mike Turner, head of global strategy & asset allocation, Aberdeen Asset Management:

Gold’s fall from grace is arguably puzzling. Developed countries remain mired by huge debt and anaemic growth, and even in relatively buoyant emerging markets expansion has slowed. In such uncertain times, one would think gold would be seen as a safe haven.

Speculation that Cyprus may set a trend for eurozone central banks to sell off gold reserves and an easing in inflation concerns have weighed on sentiment. But more important is the fact that the yellow metal has ‘morphed’ in recent years from being seen purely as a good store of value to merely another risk asset and now trades more like other commodities.

But investors should not forget the attractions of gold. No one really knows the long-term consequences of the huge monetary stimulus packages. Inflation remains a risk, however distant, and gold remains one of its best insurance policies. Equally if deflation prevails this brings into question the soundness of fiat money, in particular currencies such as the euro, which seems less stable at the moment and gold represents the best store of value against that prospect.

Central banks, particularly in emerging markets, are only just beginning to increase their exposure to gold as they diversify away from US Treasuries and the dollar.

Gary Dugan, chief investment officer, Asia and Middle East, Coutts:

We believe an attractive entry opportunity is unfolding, especially if gold consolidates around its next technical support level of around $1,250/oz.

Part of the reason is the robust performance of the dollar. The currency has been buoyed by suggestions that the Federal Reserve might pull back on its quantitative easing (QE) efforts, by the Bank of Japan’s commitment to pushing the yen lower and ongoing worries in the eurozone. As a result, there is less reason to hold gold.

In recent days, the dramatic decline in the gold price has been driven by high volume and high-intensity selling. A number of traders have hit stop-loss levels, which exacerbated the decline. Industry reports suggest that two waves of selling in Commodities Exchange (Comex) June futures amounted to a contract value of $20 billion and were key factors triggering gold’s collapse.

Short positions in both metals and steel/metal equities are at record highs. According to some sources, London Metal Exchange (LME) short positions in copper and aluminium are equally large.

We believe the sell-off is exaggerated. Sales of gold exchange traded funds (ETFs) have unwound almost all of the eurozone crisis buying seen in 2012. At these prices, gold is a good buying opportunity. We also believe some central banks in emerging markets may be minded to buy at these levels.

Our technical analysts believe the gold price will consolidate before declining to the next medium-term support level of $1,250. This would represent an attractive entry point.

Koen Straetmans, commodities strategist, ING Investment Management:

Worryingly it appears that not only the gold speculators but traditional buy-and-hold investors have thrown in the towel. More than 200 tonnes have been sold by gold ETF investors in a sharp reversal of a multi-year trend of ever-rising tonnage held by ETFs. The latter peaked at more than 2,600 tonnes at the end of last year and currently hovers under 2,400 tonnes.

The sheer size of these holdings (around 80 per cent of mine production) highlights the risk to the gold price should these investors further reduce positions, in particular as some are still in-the-money. Similarly, silver exchange traded product (ETP) holdings represent 50 per cent of annual mine production.

There are some compensating forces. There has been renewed physical gold buying in India and China after recent price falls. Central banks are unlikely to become gold sellers  - Cyprus only holds 13.9 tonnes, other central banks actually bought some 534 tonnes last year. Eurosystem central banks, plus Sweden and Switzerland, are bound by a combined 400 tonne maximum selling agreement annually until September 2014.

We hold the view that we will witness a consolidation phase of global economic growth. On signs of further economic recovery it is therefore likely that equally beaten-up cyclical segments within commodities may do better initially.

Given the high level of uncertainty over the final dominance of forces, we currently have a neutral position to precious metals.

For industrial metals, the latest Chinese GDP figures, plus industrial production and fixed asset investments (including real estate development) have been disappointing. Within the sector we prefer aluminium over copper as the former trades within the cost curve and the latter above. Aluminium is also expected to be the metal that could benefit the most from a shift to a Chinese consumer-led economy because of its uses in packaging and transportation.

Ashley King, head of treasury, Arbuthnot Latham:

Ultimately, any price support for gold depends on whether central banks will continue with their quantitative easing policy. Recent poor economic data from China, Europe and the US shows that global economic recovery is far from certain. Commodity prices have also fallen sharply in recent weeks and possibly have further to fall.

The lower price of gold has resulted in an increase of physical purchases of bars and coins, although this has been outweighed by investors liquidating other variants of gold exposure such as ETFs and moving into asset classes such as equities.

Technically the break below $1,550 may open a move lower towards medium term support at the $1,265 level. This level may represent a good buying opportunity for the longer term investor.

Bart Van Craeynest, chief economist, Petercam: 

The theories (of why the gold price has dropped so spectacularly) include: possible gold sales by eurozone central banks; reduced inflation fears because of a hesitant global recovery; signs that the US Federal Reserve is looking to end QE3; the fact that the Cyprus issue did not affect the entire eurozone as much as could be expected; and improving confidence in the global recovery.

It is impossible to assess which is the correct one. In itself, gold does not generate any income or represent any economic activity, and as such, it is impossible to put a fair value on it.

However, gold has a strategic place in our portfolios. We do not hold it because it is a risk-free, stable asset: it is not. Nor because we expect inflation to become a major issue in the near term. Money printing holds inflation risks, but only if that money is actually used and if the economy is running close to potential. Neither condition is fulfilled in developed markets today. And we do not hold gold because we fear that the world is slipping into a doom scenario: on the contrary we expect the global recovery to continue.

We hold positions in gold for two specific risk scenarios: sustained and extremely loose monetary policy with massive liquidity injections has never been tried on today’s scale. Textbook economics suggest that at some point this will lead to higher inflation and bubble formation.

Our long-term view is that the euro is gradually unravelling, and that eventually several countries will leave the euro, with significant implications for confidence in paper money.

These risks have not disappeared. If anything with Japan joining the global printing party and Cyprus getting closer to euro exit, these risks have become more prominent.

Paul O’Connor, director of multi asset, Henderson Global Investors:

The most obvious trigger is the revelation that the government of Cyprus floated the idea of selling the central bank’s gold holdings during recent bailout discussions. Commentators have been quick to extend this theme to other eurozone countries, providing alarming estimates of potential gold sales.

It’s worth noting that the central bank of Cyprus has shown no intent to sell gold; press comments suggest it would be opposed to the idea. If the Cypriot central bank sold its gold reserves it would only raise about 2 per cent of the bailout and would also deplete its foreign exchange reserves. It is questionable whether other eurozone central banks would pursue such a path, given the impact on the gold price and the stability of financial markets.

It’s quite possible that the move was amplified by a few big trades from major funds, liquidating long positions or initiating shorts. The latest data from the Commodity Futures Trading Commission (CFTC) shows a surge in speculative short interest in gold in recent weeks, to its highest level since 1999. Options prices also show a surge in demand for downside protection in gold.

I would also highlight the futures market. Gold futures require only a 5 per cent margin, which enables investors to place significant directional trades for a small amount of upfront capital. When the price moves sharply, stops get hit, triggering a 'domino effect' in the price of gold.

Other sources confirm widespread capitulation in commodities. The April Merrill Lynch Global Fund Manager Survey showed that the number of funds reporting an overweight exposure to commodities is at its lowest since 2009. CFTC data suggest that speculative positioning in copper is at its lowest level for a decade.

There is a risk that a move of this size will trigger selling in related commodities and even in other assets as investors raise funds to meet margin calls.

Richard Davis, managing director and portfolio manager, BlackRock’s natural resources team:

Some holders of gold bullion are probably fatigued after seeing the strong performance of other assets such as equities. They may also be questioning the merits of holding gold as an insurance policy as the global economy is showing signs of a recovery, so gold was already poised for selling.

We don’t see this sell-off as the beginning of a bear market for the metal. Longer term, the factors that have driven the bull market in gold have not gone away. We are yet to see the ramifications of quantitative easing, in terms of inflation. At the same time, we expect jewellery demand to pick up at these lower prices, especially in China, and some Indian jewellers are already returning to the market.

In the gold equity market, the recent sell-off has been largely indiscriminate, which has presented some excellent buying opportunities. 

Wolfgang Pflüger, senior analyst, Berenberg Bank:

The ‘Great Gold Crash’ of late has not been a singular event. To put it into perspective, as at 25 April gold has lost some 9 per cent since the start of the year. That compares to copper (-11 per cent) or lead (-13 per cent). Silver has been hit harder with -28 per cent. All these metals have broken out of their long-term upward trends. Technically speaking, they are now in a cyclical bear market. That may last a little bit longer for those whose fundamentals have changed, as it has for industrial metals: weaker demand figures combined with higher mining supply coming on stream spells output surplus, and downward pressure on prices for months to come.

The fundamentals for gold haven't changed at all. We still live in a world of governments caught in a debt trap, trying to reflate out of it with the help of unsound monetary policy, swamping the world with liquidity. We still have negative real yields on government paper and we have weak currencies (look at the yen).

So gold, and to a lesser degree silver, keeps its value (at least as an insurance you pay for the stability of your portfolio). But when almost 40 per cent of the demand for precious metals now comes from financial investors not buying the physical metal but paper stuff like ETFs or future contracts and those investors switch their holdings with a short-term view, then from time to time prices can crash.

This has been a typical sell off. Markets should be clean now. And after a period of bottom building, which could last from a couple of weeks to a couple of months, precious metals should resume their upward trend. In other words, I’m much more confident for price gains in the precious metal sector than for industrials. At year end we expect gold to be around $1,600 an ounce and silver should reach $26,50.

John McManus, portfolio manager, Union Investment, Frankfurt:

We see four main reasons for the gold price drop. First, nervousness that the Fed might end QE3 at the beginning of the fourth quarter. Secondly, the discussions about a potential gold sale by the central bank of Cyprus, possibly followed by similar activities in Italy, Spain or Portugal. Thirdly, a downgrade of the gold price by several investment banks, and fourthly sales of ETFs and futures.

We expect a gold price level of about $1,550 on a 12-month basis, as the supporting frame is still intact, with low real yields, lose monetary policy and competition in the field of devaluation. 

In the context of the gold price drop, other precious metals have also been affected, such as platinum and palladium. But palladium is attractive on a 12-month basis due to rising demand for catalyst production, as car sales are increasing in the US and China. For platinum, we also expect growing market demand.

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