Gold recently posted its worst quarterly performance in more than a century. The slide came as investors increasingly turned to equities, lured by the prospect of a yield. The price slide then accelerated as Ben Bernanke set out a timetable for unwinding the QE program. Now analysts are starting to suggest that gold may be bottoming out, or at least close to that point.
By Garry White and Emma Rowley
8:00PM BST 07 Jul 2013
Gold posted its worst quarterly performance in more than a century for the three months to the end of July, analysts at Macquarie calculate. Specifically, the metal ended the second quarter of 2013 at $1,192 (£782) an ounce, its lowest since August 2010 and representing a fall of more than 25pc below its level at the start of the quarter.
The slide came as investors increasingly turned to equities, lured by the prospect of a yield and reassured by improving economic data to move away from the “safe haven” metal.
The price move downwards then accelerated as Ben Bernanke, the Federal Reserve chairman, last month set out a timetable for unwinding the US central bank’s vast quantitative-easing (QE) programme — making gold less attractive as an inflation hedge.
But now analysts are starting to suggest that the gold price may be bottoming out, or at least be close to that point. Outflows from exchange traded funds (ETFs) have started to ease, but the gold price still remains near lows at $1,214 an ounce.
The negative sentiment has been justified, analysts acknowledge. But part of their reasoning is simply that the fall — representing the worst quarterly price performance for gold since at least the year 1900 — has been so steep that the tide has to turn.
“A more hawkish Fed, weaker gold currencies and poor supply and demand dynamics largely justify this [market] pessimism, but so extreme has the price move been, we’re tempering our bearishness,” says the Macquarie team.
It is a view that is being repeated in several quarters of the City. “While we see no imminent trigger to bring new buyers into the market sustainably, positioning would suggest downside risks to gold are increasingly limited in the short run,” say analysts at Bank of America Merrill Lynch.
They stress that they continue to see headwinds for the metal, but point to supporting factors such as higher demand for the metal in physical form from emerging markets.
Their charts show that China’s identifiable gold demand hit a record high in the first quarter of this year at more than 1,100 tonnes, much of it due to the liberalisation of the country’s gold market, but also to its inhabitants’ rising wealth and spending power.
Indeed, they argue that investors are set to lose their clout over the metal in the medium term, as more affluent emerging markets boost their gold purchases. In line with that, the team believes the metal’s price is about to stabilise, and predicts that it will average $1,478 an ounce this year, and $1,563 an ounce in the next.
And then, of course, there is the eurozone factor, with the situation in the region tending to move to the forefront of investors’ minds in past summers.
Recently, several ministerial resignations in Portugal have increased uncertainty about whether the country’s coalition government and its pursuit of austerity can survive.
There is “nervousness” about the next report for Greece from its troika of lenders, note analysts at Commerzbank, who say another flare-up of the crisis could again increase gold’s attractiveness.
“If this should prompt spill-over effects to other crisis-ridden countries, demand for gold as a crisis currency could well pick up again,” they say.
A note of caution was sounded by the team at Jefferies, however. The situation for gold equities — the companies mining the metal — remains bleak, in their view. They cited the challenges inherent to mining the metal, which often takes place in locations fraught with political risk.
“Even if gold were to bottom off its current lows, we believe gold equities face further downside,” they say. If you want to go long gold, short a basket of gold equities, is their suggestion
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