posted Aug 24, 2011 1:56 AM by Shikha Jain
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updated Aug 24, 2011 2:00 AM
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Real Gold Price Still Below Record, but Just Barely
The real gold price has not yet reached the high of about $1,952/ounce at today’s prices seen in January 1980, but it is very close. In addition, prices have gone “parabolic,” meaning they have risen by an extraordinary amount in a very short period of time. When asset prices go parabolic, they usually do not stay at those levels very long and often see a quick reversal. Thus, it is possible we could see a near-term pullback in gold based on this technical pattern. However, based on the aforementioned factors driving gold’s meteoric rise, the pullback may not be very large and will probably not last very long before gold prices start to rise again.
Gold Still Hasn’t Risen as Much or as Fast as NASDAQ or Oil
In the five years prior to their respective peaks, the NASDAQ rose 500 percent and oil rose 340 percent. Over the last five years, gold has not seen nearly the trajectory of increase, rising only about 200 percent. Thus, based on this metric, gold does not yet appear to be in a bubble à la the NASDAQ in 2000 or oil in 2008. However, the 200 percent five-year increase has risen from 150 percent in our April report.
Gold-Oil Price Ratio Above Average, but Not Unprecedented
While gold has soared, oil has dropped to around $84/barrel amid growing concerns about slowing global growth. As such, the gold-oil ratio has jumped to 22.4, well above the historical average of 15.5 but certainly not unprecedented. Furthermore, just because the ratio is above-average does not necessarily mean gold is overvalued or oil is undervalued. At this time, both the jump in gold prices and the plunge in oil prices appear to be justified by fundamentals. This ratio may decline a bit in the coming weeks, but we do not foresee an outright crash in gold prices. |
posted Aug 11, 2011 5:36 AM by Shikha Jain
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we expect gold and silver prices to remain buoyant, but silver has the potential to outperform gold on a short-term horizon, as it tends to act as a high-beta play on sovereign debt fears and worries about currencies. From a technical perspective, if the market can build a base above USD 39.5/oz, silver should target congestive resistance around USD 45/oz and then potentially USD 49.45/oz. On a ratio basis there is reason for caution – the gold/silver ratio is at 40, compared to a 30-year average of 64, suggesting that silver is expensive. But this should be ignored if technical signals turn strongly positive. We therefore recommend a long position in spot silver, targeting USD 49.45/oz, with a stop-loss at USD 35.22/oz |
posted Aug 4, 2011 12:08 AM by Shikha Jain
Market outlook and summary
Brent price maintains strength on supply concerns
The ICE Brent crude oil price has been much more stable than the NYMEX WTI price over the past four weeks, trading in a USD 116-119/bbl band since 7 July, while WTI has traded in a USD 94-100/bbl range over the same period. Brent is being supported by maintenance of the Forties pipeline, which is key for Brent crude
production. Meanwhile the WTI price has been weighed down more by both wider macroeconomic concerns and strategic stock releases into an already well supplied market.
The Brent-WTI spread should narrow once North Sea maintenance comes to an end during August, bringing Brent lower. However, with the US market, and particularly the Cushing delivery point, set to remain well supplied, we expect the double-digit discount of WTI to Brent to persist, particularly if the US market remains soft, although our forecast is still for a rebound in US growth in H2-2011.
US – A weak and weakening picture
The budget deficit deal in the US, given the emphasis on spending cuts, has intensified oil market concerns about US growth. On Friday, US Q1 GDP growth was lowered to 0.4% (from the original 1.9%) and Q2 was just 1.3%, softer than the 1.8% q/q SAAR expected. The lack of recovery in the labour market and the continued effect of gasoline prices hit US consumers significantly harder than the market had expected. Personal consumption rose just 0.1% q/q SAAR, against 0.8% expected.
Oil-market data suggests little improvement in consumer spending in July, but an improving trend in industrial/trade activity. According to the US Energy information Administration (EIA), product supplied to the domestic market was down 2% y/y in the four weeks to 29 July. Gasoline demand has been particularly disappointing, and was down 3.6% y/y. Retail prices in the US are close to the highs seen in 2008, and demand has suffered, although it is difficult to extricate the influence of prices from that of overall economic activity. That said, distillate demand – which is more of an indicator of industrial and trade activity – is up 1.7% y/y. It remains at a relatively weak level, but the improving trend supports the view of a recovery in H2-1011. |
posted Aug 3, 2011 12:36 AM by Shikha Jain
In the past week the precious metal markets saw risk aversion weigh on cyclical markets, such as palladium and silver, but gold was boosted by fears about the US’ debt ceiling and a potential downgrade of the country’s AAA rating. Global equity markets are currently down 3.8% from their most recent peak on 21 July, reflecting the latest political turmoil in the US. Gold prices are currently up 0.5% w/w, with silver down 3% w/w. Palladium and platinum have both performed well in recent weeks (in line with our positive rating) but are currently down 0.5% and 0.8% w/w, respectively.
Also important for gold is that recent PMI data has been weak, which has helped lift safe-haven flows. China’s official manufacturing PMI was 50.7 for July (barely changed from the previous month), but showed continued weak growth and orders. Furthermore, the US ISM manufacturing survey fell to 50.9 in July, from 55.3 in June. This raises renewed doubts about the pace of recovery in the world’s largest economy and US non-farm payroll data out at the end of this week will be more keenly watched than usual. As we write, it seems likely that the US government will pass legislation to raise its debt ceiling. Despite this, our US economists see a high likelihood of a downgrade by S&P in the weeks ahead. While this might cause some minor concern, and could lift gold prices, it has been relatively well flagged and we do not believe it will result in a major upset to risk appetite.
Despite high prices, central banks continue to buy gold in substantial volumes. This week the Bank of Korea announced that it had bought 25t of gold in the past two months, taking its holding to 39t. This was the first time the country had bought gold since the Asian crisis in 1997-98, and was in response to worries about the outlook for reserve currencies such as the euro (EUR) and US dollar (USD). Korea still has a modest amount of its reserves in gold compared with the region’s other central banks, so there is scope for continued opportunistic buying, especially if gold prices fall back. China currently has 1,054t of gold (1.6% of reserves), India has 558t of gold (8.7% of reserves), while South Korea’s is now 0.5% of reserves. The global average for central banks is 12%. According to the World Gold Council, the official sector became a net buyer of gold last year for the first time in 20 years and bought 155t in the first five months of this year.
Investors are buying as well, adding to the bullish story. Physical gold ETFs reached 69.2mn oz on 1 August – up 4% m/m – and are at a record high once more. We believe that this most recent surge has been driven first by worries about the sovereign debt crisis in Europe and then by the latest problems in the US. Assuming that these issues settle down, this could result in some selling of long positions in the weeks ahead, which would limit the upside for gold and silver.
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