Heightened gold volatility expected in 2008 as gold moves towards $900
The latest study from VM Group implies that gold investors should make the most of 2008.
Author: Rhona O’Connell
Posted: Wednesday , 12 Dec 2007
LONDON
VM Group, in conjunction with Fortis Bank, has released its latest "yellow book", in which the group looks ahead to 2008 and forecasts that the gold price is heading for one of the most volatile years for some time. A small production surplus of 123 tonnes is expected, which would be equivalent to just less than two weeks' projected consumption and investment demand and suggests that investor purchases will be important if prices are to remain strong. Given that the residual surplus is this small, the study acknowledges that small changes in the environment could easily swing the market into deficit, and also that the closeness of the balance intensifies the importance of external forces. The major factors affecting the market are thus identified as the fate of the US dollar, that of the western economies and prospects for Asia.
The group takes the view that the prognosis for continued background macro-economic problems relating to the probability of a US recession and additional dollar weakness suggests that there will be no lack of investment activity.
The development of a cumulative market deficit of 972 tonnes over the period 2000 - 2006 inclusive is cited as enough, of itself, to generate an increase in prices (subject to the existence of a "massive stock overhang") and that this has been instrumental in underpinning one of the strongest and longest bull markets in the metal's history. Preliminary assessment suggest that the year 2007 produced a small surplus of 220 tonnes, but it is suggested that this was superseded by a 326 tonne increase in the net long position on COMEX during the year [this long position is of course offset by a corresponding short on the commercial side of the market as COMEX is centrally cleared and this should therefore be seen as an indication of sentiment rather than a proxy for the physical market].
Looking ahead, mine supply is expected to be level with that of 2007, with South Africa expected to cede pole position to China as the world's largest mined gold producer. Scrap supply is forecast to fall and there is little likelihood of any new producer hedging. Central Bank sales are also expected to fall short of this year's levels.
On the demand side the ETFs are expected to retain their important role in supporting demand - the recent annual average of roughly 200 tonnes is expected to persist in 2008, with the emphasis still on purchasing by investment banks and funds. Adornment jewellery is expected to remain flat with higher retail prices and slower economic growth hampering purchases. The investment jewellery market is expected to be revitalised at prices under $780/ounce and petrodollars are likely to filter through to the jewellery market.
On a regional basis, European and North American jewellery demand is expected to fall slightly next year, while Asian demand is expected to recover to the levels seen in 2006 and that in India is projected to rise by 14% and Middle Eastern jewellery demand by 4%.
The performance of the US currency and the background economic outlook for the US is seen as the main guide to the price trend of 2008. This is where politics enters into the fray. The study states that "This is an election year and there will be such pressure from the White House that the Federal Reserve will do whatever it takes to stave off the threat of recession. This will translate into much lower US interest rates - perhaps a cut to as low a 3% by the end of 2008 - and a much weaker dollar than today". The study goes on to aver that gold could benefit from either or both of a weaker dollar and a recession, which latter would be likely to instigate a "rush from equities".
It is argued that it would be a great surprise if gold did not rise to $900 ounce during the year and that if the background macro-economic circumstances in the US and a weaker dollar fail to take gold to $900 then it would be a strong indicator that it has reached a new historic ceiling. By early 2009, with a new incumbent in the White House, "the going is likely to get much trickier for precious metals" says the group.