Despite Friday’s small price jump, gold had a week last week to forget – prices fell and are now down around 7% on a spot basis so far this year. More and more analysts are cutting their price estimates for the rest of the year. But there is still at least one bull, the Thomson Reuters-owned analytics group, GFMS (perhaps the most respected of all precious and base metal analysts) sees the metal rising to around $US1,850 an ounce in the back half of 2013. Bit has also warned that there’s also a danger of a bear market developing if market and economic conditions continue their recent improvement.
Gold futures prices ended the week on Friday night (our time) at $US1575 (for the June contract in Comex). That compares with the 2012 average of a record $US1,669 and an all-time high of $US1,921.15 in September 2011. Cyprus’ woes saw gold prices bounce in March, only to fade last week.
But watch for problems that emerged in Portugal and its 78 billion euro bailout over the weekend, to add to market tensions this week, but they won’t change the increasingly bearish tone to more and more market commentaries.
Société Générale last week released a report headlined “The end of the gold era”. Credit Suisse had issued an earlier report last month entitled “Gold – the beginning of the end of an era”. Both seem to have put the skids under gold prices, despite the big decision from Japan’s central bank to radically expand its already substantial quantitative easing. While that helped drive the $US23 an ounce bounce on Friday, analysts said the weak US jobs report for March was a more immediate factor.
Helping rattle confidence in gold’s immediate outlook was the move by Swiss bank, Credit Suisse to cut its average price forecast for 2013 9.2% to $US1,580 an ounce and its 2014 average price forecast by nearly 13% to $US1,500/oz. That backed up the scepticism of in its earlier report.
"While the problems in Europe and, perhaps, concerns about the impact of the U.S. sequester, may keep the metal reasonably well supported during the current quarter, we expect further weakness through the second half of the year," Credit Suisse bank said. "By long-term historical standards gold remains overvalued, both in real terms and relative to other commodities and assets.
Gold next’s test will come if it dips in the next few weeks towards the eight-month low of $US1,554.49 per ounce reached in February. Analysts reckon that if gold falls to that level, a new wave of selling will emerge. They point out that the brief rally on the problems in Cyrus failed to hold once the situation cleared last week so they now look to prices coming under sustained selling pressure from time to time in the short term.
Commodity prices generally are under pressure at the moment. Iron ore and coal prices are weakening. Copper and other base metals are going sideways, oil prices fell by 4.7% in the US last week and 5% in London. The weak US March jobs report and fears of a Spring slowdown in the economic rebound are not helping. Offsetting those price falls, US natural gas prices continue to climb, hitting 18 month highs above $US4.12 a million British Thermal Units. Despite its wider appeal to investors and others, gold can’t seem to shake off this weakness in commodities, or the feeling that the great bull run of the past 10 years is about to end.
But despite this very mixed outlook, GFMS remains positive about the prospects for gold, but even it concedes there’s a chance that the metal could hit a bear market (a price fall of 20% or more) if the present level of uncertainty in the major economies and financial markets ease..
In its annual Gold Survey 2013’medium term outlook on the gold price issued last Friday, the firm forecast that "the metal should reach the mid-$1,800s before the end of the year – a projection that would lead to yet another rise in the annual average price and which comes off the back of 2012, the 11th consecutive year of higher prices and an all-time high in nominal terms."
"GFMS anticipates that US developments will remain a key factor driving gold price movements over the course of 2013; whilst improved if still patchy economic data contributed to a softening of the gold price in recent months, the consultancy feels that the related negative overspill for gold is already priced into the market, and more importantly that there is a continued lack of confidence that ongoing debate, most immediately relating to budget cuts and further raising the debt ceiling, will smoothly arrive at satisfactory and timely resolution.
"Gold is likely to remain very sensitive to US monetary policy, and even though we’ve had some hawkish noise from some within the Fed, it’s difficult to see a material unwinding of the QE programme until well into 2014 and so that should continue to underpin the gold price in 2013.”
The report also looked to Europe to provide support for gold, saying that "even if much of its economic outlook is largely priced in, there remains significant potential for gold-friendly shocks, as evidenced by the price uplift seen in mid-March on the back of the situation unfolding in Cyprus."
Other factors cited in the GFMS report were the maintenance of a low interest rate environment and some investors’ fears over the potential for inflation to become resurgent.
But GFMS did warn that more more ‘normal’ things became in financial markets and the major economies, the more likely the gold market could stumble."
"There’s arguably clearer light at the end of the tunnel in that we can perceive a return to something more like normality for the macro-economic backdrop, and that could easily entail the start of a secular bear market, perhaps in late 2013 or more probably in 2014”.
