Gold still solid investment, despite recent price plunge, analysts say

Despite the biggest two-day falls in 30 years on April 12 and 15, gold still holds bright glitter, according to economists.

“We consider that many of the fundamental drivers that have supported gold‘s 12-year trajectory are still well in place,” said Marcus Grubb, managing director and investment strategist of the London-based World Gold Council (WGC).

While shaving 10 per cent off the 2013 gold forecast to US$1,542 per ounce, James Steel, analyst of HSBC Securities (USA), expects gold prices to stabilise thanks to retail demand in Asia as well as central banks’ demand.

In the report “Gold Investor: Risk Management and Capital Preserva-tion”, WGC said data suggested that some investors in developed markets were betting on a swift economic recovery. While economic data may seem encouraging in the United States, many of the underlying issues that financial markets face are still relevant: Countries face high levels of debt while monetary policies have yet to unwind.

At the same time, gold‘s fate does not rely only on uncertainty and malaise in developed markets.

Its performance is also linked to those markets‘ long-term economic expansion.

There is consensus that emerging-market economies will continue growing. Most economists agree that emerging markets will surpass developed market economies by 2020 in terms of gross domestic product.

Finally, the US dollar will likely remain a crucial component of the monetary system, but may have to make room for others. As central banks diversify their foreign reserves, gold will continue to be one of the most relevant.

Gold has come under significant pressure over the past months. After more than a year of range-bound prices, an exceptional sell-off in the middle of April has accentuated concerns that the metal‘s bull run has come to an end.

Investors worldwide, including in Thailand, were spooked by the sharp falls. After Songkran, local gold prices were slashed by Bt2,400 per baht weight in a single day to keep up with global declines during the long-holiday period. Domestic prices, which fell below Bt20,000 per baht weight for the first time in two years, have climbed back. On Tuesday, gold bar was sold at Bt20,450.

Grubb believes that in the short term, a stronger US dollar, fragile sentiment and worries over gold sales by European central banks will create a challenging environment for gold prices. In addition, the concentrated and violent sell-off in the second week of April will shake confidence in gold prices for some time, but does not damage the long-term fundamental drivers or gold‘s long-term strategic value.

“We believe that despite the current turbulence, the fundamentals of the gold market remain well in place,” he said. “Physical demand for gold remains strong in India and China. Between them, they account for over half of the annual global demand for gold.

“Further, irrespective of potential gold sales in Cyprus, central banks, particularly in emerging markets, have been net buyers of gold for several years, and the conditions and objectives driving these purchases remain in place.”

He added the continuing economic malaise in members of the Organisation for Economic Cooperation and Development, high levels of accumulated indebtedness, the ramp-up of quantitative easing in Japan, and the continued efforts to deal with the European sovereign debt crisis served to remind investors that this economic and credit cycle is different. The solutions will be protracted and the background level of investment risk is higher than in the past. Despite the recent and widely followed pullback in its price, gold has never been more relevant as an investment asset and currency.

HSBC also expects central banks’ net gold demand will remain at 450 tonnes as last year, particularly with demand from dollar-laden banks in emerging markets, which will continue to accumulate more gold this year and next.

On Tuesday in New York, gold for June delivery was at $1,472.10 an ounce by 7.53am, compared with $1,361 on April 15. The price climbed as investors believed that the US would continue with monetary easing.

The biggest gold sell-off so far is in the private sector. Individuals in the past few years were drawn to invest in gold through exchange-traded funds (ETFs). Now they are fleeing en masse, on fear of further price declines. According to Morgan Stanley, as of mid-April ETFs had sold 249 tonnes of gold this year.

Steel of HSBC noted that retail demand would be the key support for gold and could stabilise the price or allow a slight increase.

“Lower prices attract greater buying, especially in India and China. Based on the fragmented nature of this buying, it may take months for this new demand to feed into prices.

“Also, a sharp rally could quickly choke off a portion of retail demand. This is one of the reasons the upper end of our target range is $1,625,” he said.


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