Gold Outlook from Mr. Shamik Bhose: The May Bulletin


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Gold Outlook from Mr. Shamik Bhose: The May Bulletin

  1. 1. Gold Outlook : The May Bulletin Shamik Bhose 2012 Gold OutlookRe-birth of Uncertainty and Consumer Demand Fuel Gold -- UnderstandingGolds Crosscurrents -- Central Bank Gold Allocations Could RiseEurope Teeters On A Knife Edge - Physical Gold Demand Rising -- Gold onTrack to Fulfill its Multiple Roles –There are more complex factors in play for gold price than just liquidity. In their Q1 2012 goldinvestment statistics commentary, the World Gold Council (WGC) explained that gold has had achallenging first quarter. While investors speculated that a U.S. recovery and rising U.S. realrate would cause gold price to fall, the fact that gold demand is no longer just coming from theU.S. and Europe, but from emerging countries such as China and India means that gold pricemay respond differently to changes in U.S. real rate.Rising foreign demand for gold signals that gold is not just a dollar hedge but also a globalcurrency hedge. Also gold has acted as hedges against asset deflation and inflation, both likelyoutcomes of the still-evolving European debt crisis. While gold price seems to go up and downwith equities in the short-term, WGC clarified that golds long-term relationship with riskyassets, such as U.S. equities, has been hovering around zero historically, which means gold actsas a good portfolio diversifier.Emerging Market Central Bank Gold Allocations Could Rise If Dollar-BasedValuations Removed – WGCCentral banks became net purchasers of gold in 2010, with emerging-market central banksleading the accumulation trend as they seek to diversify their growing foreign-exchangeholdings.On average, emerging-market central banks hold less than 4% of their foreign-exchange reserves in gold, which is slightly under the 4.6% to 7% mid-range optimal levelsuggested by previous research done by academics, institutions and the World Gold Council fordiversification of reserves.Analysis of optimal gold holdings has normally been conducted in U.S. dollar terms sincegold is traditionally denominated in the U.S. dollar. A new research report by the WorldGold Council looks at the role gold holdings denominated in local currency plays in
  2. 2. diversification and the report suggests that stripping out the dollar impact could allowoptimal gold holdings to rise without adding to risk. The new mid-range optimal allocationscould be as high as 8.4% to 10%, the report said.Bearing in mind of course that gold has gone up by 17% compound year-on-year over 12years - thats about a 650% rise over the course of the bull run. So I guess it naturally begsthe question whether this is a speculative bubble. The short answer is, no its not, and thereason for that is, yes, there is a bubble out there but its not in gold, its in the other broaderfinancial markets - the US balance sheet more than doubling and indeed the real bubble is inUS debt. Gold is merely reflecting those changes and indeed not just gold but actually thebroad commodity complex, including oil and foods, so I think theres an illusion going on thatthese commodities appear expensive. The simple truth of the matter is that its your cashwhich is cheap. Perhaps its not the commodities that are expensive, its the cash thatscheap. What happens when this bubble bursts? There is still no imminentQE3. However gold did not plunge yet but actually held its line . What hasseemingly supported and cheered the gold market?Gold traders are getting more bullish and expect price to rally next,according to Bloomberg, as the IMF data showed at least twelve centralbanks bought an estimate of 58 tonnes of gold in March. Central bankers seegold as a safer alternative to fiat currency ?? That is a Paradigm shift !!!
  3. 3. There is still no imminent QE3. What has seemingly cheered the gold market? In sum, Bernankeis still cautious as the statement says interest rate will be kept low at least until late 2014.With the economy moderately improving, the Fed is not willing to do more policy easing nowbut is prepared to do more to meet growth and inflation target and leave bond purchasingoption on the table. Why, this is because U.S. fiscal tightening towards year-end and thesovereign crisis in Europe will dampen the US economic growth outlook. In Japan, the BOJGovernor increased monetary stimulus on Friday by stepping up bond purchases and extendingmaturities as economy is not doing so well. Dovish central bankers are good for gold.Gold Investors Getting Cues from the IMF and Flow DataThe IMF upgraded the world economic growth in 2012 from 3.3% to 3.5% and the U.S. economicgrowth from 1.8% to 2.1% while maintained Chinas growth at above 8%, suggesting that theU.S. and the Asian countries can grow fast enough to offset the European recession. India alsosurprised the market by cutting interest rate by 50bp on Tuesday which will help growth andinvestment demand including gold.For the week ending April 10, CFTC reported that fundmanagers reduced by 9.3% their net positions across the 18 commodities futures and options,the largest decline since 20 December. EPFR Global also reported that commodities mutualfunds, especially in gold and other precious metals, saw the largest weekly outflow since earlyJanuary. However, physically-backed ETPs remain resilient at 2,442 tonnes, just 3 tonnes lowerthan the peak in mid-March.Barclays pointed out that while a base for gold may be forming around $1,600, helped by theresilient ETP demand and gradually-rebounding physical demand, for gold to go decisivelyhigher, it needs to reestablish its safe haven appeal in the short-term. Speeches by the IMFManaging Director and the World Bank President on the world economy end of this week willlikely be closely watched by investors"Speak of the devil" is a common idiom. In the same way one feels wary of commenting upon apossible economic collapse in Europe and the destruction of the Euro, for fear that it justmight precipitate the event... despite the fact that we are all acutely conscious of thepossibility. However, if gold is a barometer of just such an event then the temperature isnudging higher.Will the Re-birth of Uncertainty and Consumer Demand Fuel GoldMany market participants have attributed the drop in gold price since end-February to adiminishing chance that the U.S. Fed will adopt QE3. The rally in risky assets such as globalequities due to better economic growth number, albeit lopsided from the U.S., led some toreduce safe haven bets such as gold.The rebirth of uncertainty takes place when the Spanish10-year bond yield surged 40 basis points last week as investors were expecting Spain, likeGreece, Ireland and Portugal, would need to request for international aid. Spain is the mostclosely-watched country as the bellwether for Europes sovereign debt crisis. The higher thanexpected Chinas March CPI number of 3.6%, compared to median economists forecast of 3.4%,may bring more uncertainty to Chinas monetary easing.CFTC data confirms that the net speculators positions on gold declined from this years peak of221,542 at end-February to 149,599 as of the week ending 3 April. The technical position forgold appears better as some of the "weak longs" have been removed from the market.
  4. 4. Gold saw tsunamis of physical gold demand in Europe in 2008 and 2010 when theavailability of anything below a 400 oz gold bar (worth $660,000) was simply not to befound for a several months. After a quiet first quarter, there are grounds for supposing thatanother wave of retail investment demand for gold might be just on the horizon. Gold is aparticularly small market and were you to liquidate an entire years gold mine production atcurrent market prices, it would have a market cap of less than Vodafone - yet it is comparedalong with such investment mammoths as the the US dollar, the FTSE 100 and the DJIA. Goldstill represents less than one per cent of total assets under management (AUM) and to rise tothe levels of the 1980s (or by 2% of global financial AUM) would require the creation of 85,000tonnes of new investment demand or 30 years of mine production. It is still significantly under-owned.Gold is currently in a protracted period of consolidation and expecting a break-out.Technically it is unclear which way the market could go - but fundamentally it looks likelythat a sharp move to the upside is a distinctly possibility based upon rising economictensions in Europe. From a technical perspective, the long term gold charts seem to besaying something big is going to happen, but unable to say clearly which way. The shortterm patterns have been quite negative, prompting some long liquidations (what you mightcall a "fake-out") but there is a larger and more important chart shape emerging.
  5. 5. The strongly bearish scenario is formed by a remarkably steady trend line back to 2008 which,if $1613 and $1600 were to be breached, would suggest an important shift in market behavior.Furthermore, gold has a descending triangle which technical analyst’s suggests would beresolved by a move downwards to $1525... a game changer. The bullish argument is that goldcould be forming a massive "reverse head & shoulders pattern". The symmetry of this pattern,coupled with falling open interest, suggests a likely continuation considerably higher. A breachof $1700 would then be confirmed by a close above $1800 with a target to breach $1920 (theprevious all time high) topping out at $2080.The gold market has been characterized by flat prices and declining open interest, asspeculative interest fades. Usually the gold market finds equilibrium or a "bottom" before theprimary trend reasserts itself - this seems to be what is happening nowAfter rising almost 11% in January, gold Comex futures declined 3 months in a row, at theend of April. Year-to-date gold futures gained 6.3% compared to MSCI World (DevelopedMarket) Index, 10.8%, CRB Index, 2.2% and Dollar Index, -1.7%. From this years peak reachedon 28th February at $1,792.7, gold futures declined 7%.While spot gold in US dollars has not recovered from its early September peak of $1,921.1,gold bar per 10 gram in India has reached an all-time high at 29,600 INR per 10 gram on30th of April. In India, festival and marriage season demand for gold has helped push the goldprice higher. The weak Rupee which declined 19% in the past year caused gold to reach an all-time high despite the fact that gold in US dollars is still 15% lower than the recent peak.Uncertainty in both the Indian economic performance and its investment-grade rating wouldcause people to seek gold for a safety hedge while a weaker Rupee would bump up local price.What might have caused the different performance of gold? In the developed market, goldprice has been see-sawing recently as investors weigh on the economic data in the U.S., policystatement from the Fed, re-ignition of European sovereign debt crisis as well as Central Banksgold purchasing actions.
  6. 6. In terms of the Indian and Chinese demand for gold its a lot easier there perhaps to buyphysical gold than perhaps it is in other parts of the world. That clearly must haveattributed to the rising demand there.And those markets are very efficient, certainly India.The bid-offer spread, for want of a better way of putting it - the difference between thebuying and selling price - is very tight. If youre looking to sell gold in India, its about minus1% - you get 1% below the spot price. If youre looking to buy fabricated jewellery productsyoure paying about 2% above spot and thats for a very intricate product, whereas in Europethe spread is roughly more than double that, so the European market is less efficient. And theChinese market you alluded to is the new market and thats growing in efficiency. Its arelatively new market, it only liberalised in 2004 for the first time for over 40 years, but itsshowing remarkable growth and the present time while demand in India seems to be stalling,the Chinese seem to be picking up the baton and running with it, because as weve seen,imports of gold into Hong Kong have been remarkably strong and the outlook seems to be thatthat will be maintained. SPOT GOLD:Date Open Low Close High % gain from previous year high2005 437.3 410 516.6 540.952006 517 516.75 636.3 730 34.952007 636.8 601.8 833.5 846.3 15.932008 835 681.6 880.3 1032.8 22.042009 879.7 801.5 1096.5 1226.65 18.772010 1099.2 1043.75 1420.75 1431.3 16.682011 1420.75 1307.45 1564.00 1920.00 10.02Gold on Track to Fulfill its Multiple RolesWhile investors and traders are speculating whether the U.S. Fed will engage in QE3 or not andwhere gold price may head, the Euro crisis still has a major bearing on gold price. Europe issimultaneously facing three crises: banking, debt and economic growth crises. According toJefferies Chief European economist, Europe needs to see enough growth to escape from theworst of its problems. To have growth ECB may end up engaging in a fully transparentquantitative easing policy, perhaps as soon as the third quarter, if economic conditions remaindistressed.The latest GFMS gold survey predicted that gold investment demand, especially physical golddemand, is the current key driver of gold prices and can reach 2,000 tonnes in 2012. Centralbanks which became net buyers of 400 metric tonnes in 2011, will remain gold buyers in 2012.However, the head of Metals Analytics of GFMS also warned that production supply willcontinue to grow at 3% this year as producers are motivated by higher prices, producer hedgingwill probably go up after 10 years of de-hedging and investment demand will need to rise asmuch as $130 billion in order to fill the gap between supply (mining plus scraps) and fabricationdemand.
  7. 7. $4,000 gold and $100 silver or lower bullion prices and $20 silver asks..... Ross Norman ofthe blue-blooded Sharps Pixley brokers from London the recent leader of the bullish camp.He forecast $3,500-4,000 gold prices and $100 an ounce for silver by 2017. His recentpresentation entitled Silver has the bubble burst? argued that no it had not, and that merelyprojecting forward recent growth rates arrived at $100 an ounce within five years. Negativereal interest rates were the reason for high precious metal prices cited by most experts. Inshort inflation is higher than the cost of money so cash on deposit is losing money.Dr Paul Walker of consultancy GFMS Thomson Reuters. He suggested that investorenthusiasm for gold and silver is wearing thin and that higher interest rates could be thereal black swan event after the US presidential election is over. Dr Walker noted that itrequired $120-150 billion of investment demand per annum just to sustain current bullionprices. But if the bond market collapses the amount of money in search of a safe haven wouldbe a multiple of that times ten or even a hundred times. Investor fatigue? Precious metals willrise until that ceases to be the case, or so contended arch-bears ; one would not doubt thispossibility. But we wonder if the immediate impact would be a lower gold price. For surely thiswould mean a bond market crash, and that is precisely the event that will maximize preciousmetal prices.
  8. 8. Shamik Bhose regards,Shamik BhoseExecutive DirectorCommodity & Currency & Interest rate futures MarketsMicrosec Commerze ; www.commoditylive.inPhones 009133-30512100 / 30512139 -40Fax 009133 -30512020To see our various commodity and related world financial market articles visit www.slideshare.netAnd and type Shamik Bhose in the search column to access our latest reviewand outlook articles alongwith most recent reading interest ;DISCLAIMER AND PRIVILEGE NOTICE : This e-mail and any files transmitted with it containconfidential, copyright, proprietary and legally privileged information. It should not be used byanyone who is not the original intended recipient. Any use, distribution, copying or disclosure byany other person is strictly prohibited. If you receive this transmission in error, please notify thesender by reply email and then destroy the message. Opinions, conclusions and otherinformation in this message that do not relate to official business of the writer or associates /group shall be understood to be neither given nor endorsed by us.. Internet communicationscannot be guaranteed to be timely, Secure, error or virus-free. The sender does not acceptliability for any errors or omissions