Gold Price Outlook Mostly Bullish – November 2012

In the past few days an increased number of commentaries appeared about the outlook of the gold price. Interestingly they differ in their subtlety and long term vision. What follows is an overview of the most important points of view, which we’ve selected to show the divergence. As we don’t want to come across as biased, we include both bearish and bullish outlooks. We believe that the bullish ones are fundamentally better argued. They are closer to the long term vision of Gold Silver Worlds.

Citigroup believes that the commodities supercycle is over as China’s economy shifts to slower growth and supplies increase. Although they don’t specify their gold outlook, our understanding is that they consider precious metals being part of the commodities. BusinessWeek writes the following:

“Prices won’t move ‘sharply’ higher even as stimulus measures from global central banks lift growth and demand rebounds by the end of 2013 … Returns will be more ‘differentiated’ among raw materials depending on supply- demand balances, Citigroup said … It is now clear that the commodity super cycle is over. No longer will a pure long-only strategy bring the returns expected in 2002 to 2008. Nor will conditions approximating those of the last decade return any time soon.”

On the other extreme, Marc Faber expressed his concern about the current economic situation and ongoing interventions by central planners during his speech at the LBMA Conference in Hong Kong. BusinessInsider cited the following:

“Once the deflationary collapse finally arrives (the impossible question is knowing when, said Faber), there will be great opportunities in real and productive assets. But until then, and as for the Gold Price ahead, “Gold is not anywhere close to a bubble stage,” he concluded.”

On a more moderate level, ScotiaMocatta reported their expectations of a gold price of $2,200/oz. They didn’t exclude that $1,600/oz. is still in the cards short term in case we will see a correction in gold. The company doesn’t believe the peak in gold is in and doesn’t expect the bull market to be over before the end of next year. They wrote about what they perceive as the major driver of the gold price, as quoted by Mineweb:

 “Europe has a debt problem that is proving all but impossible to solve and all efforts to date have revolved around throwing more money at the problem to avoid the monetary system from breaking down,” ScotiaMocatta observed. “That should be reason enough to be bullish for gold and we think the latest move higher in gold prices shows that it is.”

“As faith in policymakers wanes with their handling of the crises, we expect investors will not want all their wealth backed by paper assets and therefore will look to spread their risk by holding gold and other hard assets,” ScotiaMocatta noted. “Greater monetarisation of gold is likely to be bullish for prices.”

In the meanwhile, India is helping to boost gold demand as the festival season is reaching its top. Although specific figures are not published yet, Mineweb reports that sales of gold bars and coins (as gifts for the festivals) are booming. This demand should be an additional driver for the gold price. An interesting insight brough forward by Mineweb: did you know that more than half of the money Indians spend on gold goes to jewellery for the over 10 million weddings held in the country each year?

Additionally as well out of India: the Reserve Bank of India is prohibiting local banks to provide financing to gold dealers and traders. The Indian Express writes that “the decision was taken in view of significant rise in imports of gold in recent years putting pressure on current account deficit.”

In closing, it’s worth mentioning that the US is struggling with the upcoming debt ceiling. Geithner confirmed during an interview on Bloomberg that consumer confidence is being damaged because of the economic uncertainty. He admits immediate actions are needed to avoid a worsening of trust. Geithner believes that that a solution “is within our grasp, within our reach” and that “it’s not that complicated.” Moreover he said that the debt ceiling should be eliminated, and “the sooner the better.” Without an increase in the ceiling, the government may not be able to pay all of its bills and risks defaulting on its debt. This reminds us of August 2011, where the gold price went parabolic because of a very similar kind of debate, that remained without any meaningful outcome until the day the debt ceiling was reached. Is this situation about to be repeated?


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