Gold flirts with $1,700: Soft-landing or take-off?

Gold has seen a decline of about $90 per ounce in October

Spot gold prices fell to $1,700.77 per ounce intra-day Friday, October 26, before recovering a little and closing the week at $1,706.40/oz.

This means that gold has seen a decline of about $90 per ounce in the month of October, down from a month-high of $1,793 per ounce recorded on October 4, 2012.
 
“After pushing higher on the Fed’s reassurances of the previous day (Oct, 25), uncertainty soon returned to the precious metals complex,” Marc Ground, Standard Bank’s pr3cious metals anslyst, wrote in his daily commentary on Friday.
 
“While the Fed’s reassurances were welcomed, its ‘wait-and-see until after the elections’ approach will keep any QE enthusiasm in check. A questioning of the extent and longevity of QE3 was no doubt further heightened by the better-than-expected durable goods orders number (9.9 per cent m/m, consensus: 7.5 per cent m/m), as well as a moderate improvement in jobless claims data (initial claims fell to 369k, while continuing claims were slightly less than expected at 3,254k),” said Ground.
 
But as the yellow metal flirts with the $1,700-mark, are we set to see lower lows in the remaining two months of the year, or will gold climb back above $1,800 and go beyond its projected price?
 
The projections indeed vary by a wide margin on who is making them. Here are a couple that caught our fancy.
 
Global Hunter Securities last week raised its average gold price forecast for 2013 and 2014, and said that gold prices can surpass $2,000 an ounce by early next year. Now that’s bullish, and we like bullish. And $2,000/oz in, say, three months means gold will have to climb $100/oz or so every month –and that’s definitely possible.
 
“The US Federal Reserve, through multiple initiatives and actions, consequently has become gold’s best friend during the past four years,” Jeffrey Wright and Richard Hastings, strategists at GHS, said in a report. And “the commitment from the Federal Reserve to maintain an accommodative policy until 2015… provides a strong foundation for what we expect will be continued gains in gold prices into 2014.”
 
It seems GHS has turned into something of a gold bull from a precious metals bear – for, until last week, it’s 2013 forecast for gold was an average of $1,500/z. Now, it has raised that to an average of $1,850 an ounce, and also upped the 2014 average price forecast to $1,750 from $1,400.
 
A couple of weeks ago, major bullion bank HSBC cut its 2012 average gold price outlook for 2012 to $1,700 per ounce from $1,760 in light of price weakness earlier this year. Of course that came as a result of the weakness seen in the yellow metal earlier in the year, but it also sheds some light on what HSBC thinks will be gold’s price going forward – in November and December.
 
Obviously, it doesn’t expect the yellow metal to perform any better than the current broad range of $1,700-$1,800/oz, or else it wouldn’t have brought the 2012 average down by $60/oz.
 
However, the bank did raise its 2013 and 2014 forecasts on solid investor demand and high commodity prices. On October 17, 2012, HSBC raised its 2013 gold forecast to $1,850/oz on average, from $1,775/oz. It also raised its 2014 price forecast to $1,775/oz from $1,750/oz.
 
Then there are the likes of Money Morning Global Resources Specialist Peter Krauth, who maintains that gold could hit $2,200/oz by April or May next year.
 
In a world where projections and predictions are currently more volatile than the actual gold price, what should an investor do? Should you buy more gold at these prices, hold on to what you might already own in yellow metal or sell-off and take shelter?
 
Let’s look at the two key drivers of gold price to make up our minds.
 
India
 
Indian demand for gold fell off a bit in 2012, thanks to Indian authorities blaming gold for the country’s economic woes and raising the import fee on gold. A weak Indian rupee also dampened gold demand in India, which is the largest gold consumer in the world.
 
That is one key factor impacting gold prices right now, but if history is any indicator, you can’t keep the Indians away from gold for a long time. The ‘pent-up’ demand in gold from India, if it materialises in 2013, will be enough to easily push the yellow metal into unchartered territory – i.e., beyond $2,000/oz.
 
Keep an eye on India’s economic numbers to track where gold might be headed in the forthcoming year.
 
Central Banks
 
Another support for gold prices in 2013 will be continued central bank buying.
 
“For gold, as for many other assets, central bank policy announcements and actions in late August and early September created a catalyst for price activity,” World Gold Council (WGC) said in its latest quarterly report on gold investment statistics.
 
“It is critical to note that while gold prices react to monetary policy developments, they are more generally determined by a geographically and thematically broad set of factors. A number of positive gold-specific developments also took place in Q3, including the IMF’s reporting of central bank purchases of gold by Russia, Turkey, Ukraine and the Kyrgyz republic,” it noted.
 
“Just before the start of the third quarter, Turkey announced that it had raised to 30 per cent the proportion of gold held by commercial banks as capital requirements. This requirement will likely boost demand as Turkish commercial banks use gold as part of their capital portfolios,”the WGC report said.
 
After many years of shedding reserves, net gold buying by the official sector reached 389 tonnes last year, and another 161 tonnes in the first six months of 2012. The desire to diversify from major currencies may continue to drive such demand in the future too.
 
The central bank in South Korea is a prime example. The Bank of Korea, holder of the world’s seventh largest reserves, bought 56 tons of gold since its purchases began last June. This makes it the second biggest buyer of gold bullion – among the central banks that disclose their actions –trailing only Russia. Since its gold reserves are still small compared to its peers, South Korea is likely to continue buying gold.
 
Its head of investment strategy, Lee Jung, told the Financial Times, “Gold is a safe-haven asset so higher exposure to gold can boost the credibility of our foreign reserves.”
 
Many other emerging market central banks feel the same. Their gold reserves are well below the gold reserves carried by western central banks. Look for more ‘official’ buying in 2013 lending support to prices.
 

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