Bears beat up on gold bullion
RBC joins the likes of BCA in warning that the outlook for bullion is to the downside for now; a longer-term positive outlook appears, however, to remain intact.
Barry Sergeant
24 Apr 2008
Johannesburg
Myles Zyblock, chief institutional strategist at Royal Bank of Canada Capital Markets (RBC CM), has joined a growing chorus of experts, such as analysts at the Bank Credit Analyst (BCA), in warning over growing headwinds for the dollar gold bullion price. This caution, however, is limited, in terms of timing, to the shorter term, with a bullish case for longer-term prospects apparently remaining intact.
Close to the top of the agenda is found the global debate on whether inflation or deflation poses a bigger threat. For RBC CM, the long-term outlook for gold is appealing, "since bullion should provide an effective hedge under either scenario", something which has been "an important foundation for our optimistic leanings towards gold since 2003".
But now, RBC CM names three factors "that just might temporarily stop gold's bull-run in its tracks in a manner similar to the multi-month consolidation seen in 2004-2005 and 2006-2007": a moderation in inflation expectations; the potential for a modest counter-trend bounce in the dollar, and time now moving into a traditionally weak part of the calendar for gold bullion.
The big bet investors have placed on the "inflation trade", argues RBC CM, poses some risks for the gold price over the next couple of quarters because, so the argument goes, "the increase in inflation expectations - reflected in part by gold's performance - may have gotten ahead of itself. It's no coincidence that gold's recent run to new record highs has come at a time when bond markets are pricing for the highest expected inflation rates in over ten years".
In reality, global inflation has failed to corroborate expectations, leaving gold vulnerable to a re-rating downward in inflation expectations as economic activity continues to moderate. BCA Research notes that inflation worries in the US have remained intense, despite the economy; high profile gasoline and food prices, at 23% of total CPI, are surging, of course, but BCA Research anticipates that core CPI in the US should drift lower this year. In the Eurozone, it is anticipated that the impact of food and energy prices on inflation will decline by the third quarter.
BCA Research has been bullish on gold since the beginning of the decade, calling for the precious metal to hit $1000/oz, based mainly on gold bullion as primarily a global liquidity play. The "extremely accommodative monetary setting during the aftermath of the tech bubble" early in the decade provided the early fuel for gold bullion. More recently, the US housing bust and ongoing credit crunch reopened the liquidity taps.
Heading forward, precious metals could continue to find support until US policy reflation (rate-cutting) is further advanced, argues BCA Research, and European central banks capitulate. That said, analysts warned already in mid-March that "gold now appears overbought . . . the rally is in a late stage".
RBC CM argues also that faith in the decoupling hypothesis - that robust economic growth around the world would continue virtually unhindered, even in the face of a US slowdown - is now being put to the test on "a steady stream of evidence . . . that the global economy is not as immune to a US slowdown as once thought". The lagged impact on other economies' fortunes could provide the dollar with near-term support (and gold with near-term headwinds) in the process.
As for the time in the calendar, history shows that gold prices tend to decline as the weeks move towards the northern hemisphere summer. This year, says RBC CM, the seasonal drop-off in gold demand "could be exacerbated by the intense food price inflation currently being endured around the world, and especially in emerging economies".
These three risks arrive, moreover, at a time when the gold trade has become crowded, argues RBC CM: "marginal fundamental shifts can lead to magnified price responses once trades have become fairly one-sided".
The bottom line for RBC CM is that possible risks for gold bullion are seen as "immediate or shorter-term in nature and do not change our long-term bullish case for gold". On Wednesday, analysts at UBS cut their short-term forecasts for the dollar gold bullion price. In the markets, the price fall on Wednesday to below $900 an ounce, more than 10% off last month's all time record of $1 030 an ounce.
From www.moneyweb.co.za