Gold secular bull market is still intact and remonetisation has begun!
Austria’s Erste Bank predicts a ‘shiny outlook’ for gold in a very
detailed Special Report.
Author: Lawrence Williams
11 July 2008
In a 60 page Special Report on gold, Austria's Erste Bank reckons that
in spite of the recent correction the yellow metal "remains in a secular
bull market and that the positive fundamental outlook will not change a lot
over the remainder of the year and beyond."
Analyst Robert Stoeferle says the gold price is clearly driven by two
parameters - namely a) "the shape the financial markets are in and, in
connection, the level of interest rates, the inflation expectations, and the
scenario of the currencies and; b) the status of the real economy and thus
the situation of production and of demand (as mainly determined by the
jewellery industry)"
He goes on to state that "since the relevance of gold in an industrial
context is very limited (as opposed to copper or oil), the price depends
much more crucially on the status of the financial sector (in the short
run)."
In its conclusions, the report quotes a number of factors which support a
continuing rise in the gold price with the supply/demand balance unlikely to
improve in the medium term - the only potentially adverse scenarios in this
case being a dramatic decrease in gold imports in India, which is considered
unlikely, or a very fast increase in mine production - which again, on data
available, also looks to be unlikely.
Factors seen as positive for gold include a continued fall in primary
production, increased demand from Central Banks in the emerging markets and
a long term increase in jewellery demand also from emerging markets as
earnings and living standards increase. The gap between supply and demand is
thus likely to widen progressively and can't in reality be closed by
recycling and Central Bank sales.
On the politico-economic front, the Bank feels that the "massive loss of
trust on the capital markets and the still smouldering dangers from
inflation" means that the "crisis-proof" metal should remain in strong
demand over the coming months, with gold and precious metals seen as the
only asset class capable of retaining value in both inflationary and
deflationary settings on a sustainable basis.
Mined production of gold seems unlikely to increase significantly as mining
companies are finding it increasingly hard to maintain profitability despite
the big price increases of the past few years. The increased revenues as a
result seem to be being more than matched by corresponding increases in the
costs of labour, energy, equipment and production costs. Furthermore with
most easily mineable reserves of gold at or nearing exhaustion the cost of
working less accessible and lower grade reserves is also having a
substantial impact on supply potential. Mining costs of up to around $600 an
ounce, and rising, also serve to underpin the potential gold price downside.
On the monetary front, the report points out that foreign exchange reserves
have increased more than four-fold over the past ten years to over $US6
trillion and there has to be the possibility that some Central Banks with
massive surpluses may wish to diversify holdings away from the weak US
dollar into more secure assets such as gold bullion.
The global financial crisis/credit crunch also seems far from over and with
ambivalent US economic data continuing to emerge there is the likelihood
that interest rates will have to be cut further, or at least maintained at
low levels and there is a traditional correlation between a high gold price
and negative real interest rates.
Stoeferle goes on to comment "Currently only massive interest rate hikes
could weaken the gold price in the long term. But in contrast to the
situation in 1981, this seems unlikely to happen. At the end of the 1970s
the period of high inflation in the USA could only be remedied through
massive interest rate hikes by then-chairman of the Fed, Paul Volcker.
Nominal interest rates were at 20%, while real rates were at 8%. The USA was
a net creditor and had a positive trade balance in 1980, but the situation
has reversed in the meantime. Private household debt and public debt have
reached alarming levels. Therefore an imminent rate increase under the
current chairman seems unlikely - a scenario that should lay a solid
foundation for future gold price increases."
Investment demand should also continue to increase for commodities in
general and gold in particular with most investors and funds underweight in
the sector. Investors are beginning to remember the benefits of gold and in
effect its remonetisation has begun.
Negative factors are seen as a falling oil price, which could bring the gold
price down with it, while a stronger dollar could also depress the price for
a time. There could be a possible reduction in jewellery demand and increase
in recycling, although this could be offset by the continuing rise in
‘investment' gold. Gold price weakness could also be apparent in a prolonged
and severe recessionary period.
Even so the report recommends seizing the current opportunity to buy as soon
as the recent ‘profit-taking' trend is past as the overall conclusion is
that the bull market of the past years is based on tangible causes, and
while the big upsurge over the past few months was strengthened by he
financial crisis it still considers the risk/return ratio for gold
investment as ‘very positive', with the bull market likely to remain in
place for the foreseeable future given the solid base for the current price
level.
With seemingly massive support seen around the $850 level, the report
suggests that the price will remain in the $850-$950 band during the summer
months with the $1000 mark being clearly passed again later in the year.
Passing $1200 is seen as the first target and in the long run the price is
seen as passing the inflation-adjusted all-time high of $2,300.
As if to place emphasis on the remonetisation aspect of gold, Stoeferle
concludes his report with the J.P. Morgan Satement to the U.S. Congress in
1913 - "Gold is money, and nothing else".
From www.mineweb.com