LONDON (Commodity Online): After a lacklustre performance in the past few months, the yellow metal has suddenly shot to record highs in the past week which has not surprised those who were consistently bullish on gold. "My forecast earlier this year..of $1700 gold by year-end 2011 now seems within easy reach," Precious Metals economist and Managing Director of American Precious Metals Advisors said in a note.
What is more surprising is that gold rally has taken place at a time when 'seasonal weakness' should actually keep prices subdued.
ABN Amro Metals Monthly prepared in association with VM Group has highlighted the following factors responsibe for the recent gold rally:
1) Global financial uncertainties: Deteriorating US economic data and deadlock over the $14.3bn debt ceiling
negotiations, Europe’s sovereign bond crisis, and hints from the Fed that additional policy stimulus may be on the horizon, all fuelled the rally.
2)Energy Inflation: The rapid rise in energy prices over the first half of this year, the fall-out from the Japanese earthquake and tsunami disasters as well as the end of QE2 have dented growth and sparked fears that the US may not be in a soft patch but rather entering a double dip recession.
3) Eurozonde Debt: Investors also focused on problems in the Eurozone, where risks of contagion from the Greek debt crisis also supported investment activity in gold. While disagreement over a Greek bailout plan continued Moody’s downgraded Ireland’s government paper to below investment grade (to junk status, from Ba1 from Baa3).
4)QE 3 possibilities: However, the key catalyst to drive gold over the $1,600-level was news that the Fed was considering further policy easing. The release of minutes from the FOMC’s June meeting revealed that various members were, dependent upon further weakening in the job market, in favour of fresh stimulus so long as inflation remained in check. On 13 July Bernanke in testimony before Congress made a statement long awaited by gold investors: “On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.
According to Jeff Nichols, the present gold rally "..is just the beginning of gold's next great leap upward, a move that very likely will carry the metal to $2000 an ounce in 2012 -- with prices still headed higher, quite possibly to $3000, $4000, and maybe even $5000 an ounce by the mid-to-late years of the decade."
"Contrary to the view expressed by most serious gold analysts, we said in past reports that gold would not pause for its typical summer vacation. And, it hasn't! Now, however, seasonal factors will kick in -- giving gold more firepower in the final months of the year," Jeff Nichols said.
India gold demand remains robust despite high prices on weak equities.Gold demand has grown at an average 13-14% annually over the past 10 years and comprises nearly 15% of total global demand. Demand for gold jewelry in India's tier-II and III towns are set to rise on increasing affluene and preference for branded jewelry.
Investor interest in gold received a fresh boost in July, ABN Amro report said. Investment inflows will continue to be supported by ongoing Eurozone debt woes, the weakening US economic backdrop and the potential downgrade of treasuries. However, most crucial will be the situation in housing, the jobs market and asset prices. The Fed’s mandates remain focused upon full employment and stable prices, yet in review of the latter during QE1-QE2, the Fed is clearly willing to tolerate a weaker dollar and higher prices, particularly in commodities. If the jobless rate creeps back towards 10% and home prices slide further, then there remains little doubt that further policy stimulus will be unveiled. News of a third round of QE (or targeting of yields on longer dated treasuries) will prompt a fresh gold rally, ABN Amro Monthly July report said.
