Gold Prices have been volatile of late – but that doesn't mean gold's not a safe haven...
HSBC precious metals analyst James Steel tells Mineweb's Geoff Candy why he believes gold is rediscovering its safe haven appeal...
GEOFF CANDY:
Welcome to this weeks edition of Mineweb.com's Gold Weekly podcast.
Joining me on the line is HSBC's chief commodities analyst, James Steel.
We've seen continued turmoil in Greece; they still don't have a full
government as yet. We've seen concerns around Italy and their President
Silvio Berlusconi as well as gold's safe haven re-emerging to some
extent, flirting with $1800 an ounce. Is this likely to continue do you
think?
JAMES STEEL: Yes I do for as long as the
European sovereign risk crisis is with us we are likely to see gold
relatively well bid. I agree precisely with your term the re-emergence
of its safe haven status. For a while there, gold was trading more with
risk instruments. That's to say that as risk came off and equity markets
for example weakened, gold would decline and say risk appetite
increased and equity markets would rally. Gold tended to rally but it's
moved away from that a little bit in the last three weeks and now it
appears to be attracting more safe haven demand as the situation in
Europe apparently deteriorates or at the very least one could say it has
not been solved yet.
GEOFF CANDY: There is a
view and most notably from the Natixis Bank that because of the
volatility that we've seen in gold of late, it's view as a risk free
asset and perhaps as a safe haven as a result of that is really
questionable.
JAMES STEEL: I don't think this
high volatility necessarily obviates it from being a safe haven. One
would expect high volatility if the paper markets are volatile – so I
don't think that big price movements or swings in the paper markets
should elicit big swings in the bullion market without it necessarily
bringing in, calling its status as a safe haven into question. But I
would agree that for a while there as the bullion markets were tending
to move with risk then it seemed to be more influenced by the way the
currency markets were reacting or other markets than as a safe haven.
Gold is subject to a myriad of factors and it's not always primarily
driven by safe haven demand although I think as we speak that is the
primary focus.
GEOFF CANDY: It's something that
Ian McAvity spoke to me about yesterday in another one of Mineweb's
podcasts. He said for the individual at the moment and going forward,
gold may well be the only place to hide. Would you go along with that statement?
JAMES STEEL:
Well its certainly one of the places and of course being a precious
metals analyst, my emphasis is on gold and the other precious metals and
may not be as familiar with the other bolt holes if you like, that
would open up, but traditionally it is a tried and true safe haven asset
and we don't just have a few years data on this – many decades
stretching very far back and gold has been successfully utilised as a
safe haven – and in fact if you look at what the core issue is right
now, it's confidence, be that confidence in the United States,
confidence of investors in Europe, in Japan and the decline, or the
erosion I should say in confidence in the financial markets or in
elected officials even as one can see from low popularity ratings for
most of the elected OECD officials.
That has traditionally been a
boon for gold and I think that's the current climate that we find
ourselves in. I don't know if gold is the only safe haven but it is a
powerful one and it is a very attractive one and one of the reasons is
that it is a hard asset but also because it's a hard asset that is
highly liquid. We have many other hard assets in the world for example,
Canadian farmland springs to mind as a hard asset and for all I know it
could be a very good investment but it's not as liquid as gold, you
can't sell it in a hurry and many other hard assets you can't dispose of
quickly. That is quite the opposite with gold so it is almost this
unique blend of being a hard asset and liquid at the same time that I
think makes it such an attractive safe haven and one of the few ones
that spring to all investors' minds.
GEOFF CANDY: That
all being said, if we do see a drying up both of confidence and of
liquidity in the financial markets within Europe and perhaps throughout
the rest of the world as well as a result of this debt crisis that's
been building up for quite some time now, surely all commodity markets
are going to be hit and that doesn't necessarily exclude gold?
JAMES STEEL:
It depends how gold is going to react. In one sense if would be a
negative for gold. Gold is part of the large commodity indices, it's a
small part. Agricultural food products, particularly energy products are
much higher and have much greater weightings – so if those commodities
were to decline because of lack of demand for whatever reason and I'm
not saying that they will but if they were to – one would get downwards
pressure on gold that is true. However that could very well offset. That
would not be the only factor working on gold and that could well be
offset by the movement of capital into gold and if there's relatively
few alternatives available to investors.
GEOFF CANDY: You mentioned energy. Has there been much impact of higher oil prices on gold at the moment?
JAMES STEEL:
I think there has been – it is one of the factors that's been
motivating gold but hasn't had quite so much press. I think since we had
reduced production from Libya that's allowed OPEC to step up to meet
that demand but it's reduced spare capacity and geo-political tensions
of surrounding Iran – also have lent support to gold and much of that is
centred on the oil markets. I wouldn't say by any means is it a driving
factor but I think it's been one of secondary support that's tended not
to be looked at. Let's face it with the European sovereign risk issues
and with the US budget deficit issues and the time coming up for the
select committee, the gold market certainly has other things which are
occupying investors' attention but that's not to say that there aren't
other bullish factors at work on the markets.
GEOFF CANDY:
If we look at what's going on in the US and what's likely to happen
going forward, what would be the best and worst case scenarios you can
sketch for gold going forward over the next few months?
JAMES STEEL:
Here I would have bow out a little bit as I'm not an expert on the
sovereign risk crisis by any means so I could only speak in very broad
generalities – but if we are going to continue to see a lack of
confidence and uncertainty and a lack of resolution to the crisis I can
only see that that would in the long run be positive for gold. Equally,
if someone or some organisation or some group of nations come up with a
viable solution that restores confidence in the market, I would see that
as undermining gold.
How that would work out I am afraid one
would have to turn to experts on the sovereign risk crisis and that's
different from my pay grade I'm afraid but at least to date we seen – if
you look at this longer term, we've had one form of crisis or another
since the middle of 2007. What started off as a local North American
sub-prime mortgage crisis, morphed into a US credit crisis, into a
global financial crisis, into a global economic crisis and by the
beginning of 2010 it did become a sovereign risk crisis. So we've really
had five incarnations of this crisis – and each time gold has rallied a
couple of hundred Dollars so it shows that gold has over the long run
fed off this crisis.
GEOFF CANDY: Just to close
off and moving to the other side of the world if you will, our editor
Laurence Williams wrote a very interesting piece about the fact that as
the west struggles with what's going at sovereign risk level, China is
buying incrementally more and more gold and bolstering it's reserves and
almost as the west sells gold, so China buys it to some extent, how
significant a factor is that going to play going forward?
JAMES STEEL:
I think it's going to be a central issue in the long run. There's an
old saying in the gold market, gold goes where the money is, and it came
to the United States between World Wars I and II, and it was
transferred to Europe in the post war period. It then went to Japan and
to the Middle East in the 1970s and 1980s and currently it is going to
China and also to India and simply again there's different reasons but
all lead to greater bullion demand be it as incomes rise and there's
greater disposal income that can be spent on luxury goods or simply
because emerging markets or countries that are growing very rapidly tend
to have a higher inflation level because the economies are expanding so
rapidly and that also calls for a demand for gold.
So between
China and India both, given long run projections of increased income and
their greater weight in the world that I can only see that as an
important factor in sustaining a long run bull market but also the best
way to look at it is that those countries which have the highest or
greatest predilection towards owning gold, be that for social, cultural
or even religious reasons, are those countries that are growing the
fastest – so I think its safe to say that a demand will be well
cushioned by emerging market interest in gold.
GEOFF CANDY: Are there any bearish factors for gold as it stands at this time.
JAMES STEEL:
Yes of course and I certainly don't mean to paint a unilaterally
bullish picture. I think the possibility that further increases could
crimp jewellery demand would be one and the jewellery is still the
single largest component of physical demand and when jewellery demand
goes down that frees up significant amounts of bullion for the
investment market and without a decline in jewellery we could not have
fed the demand for example the ETFs at these prices.
The
other thing is that higher prices will also elicit greater scrap and
refined markets, as I am sure your readers are well aware of like most
other commodities gold has never completely consumed, it's stored one
way or another, some place or another and more higher prices will elicit
greater scrap supply. Also the bull market will likely not continue ad
infinitum and I think that a return to real interest rates would be a
very important factor in the end of the bull market when that occurs.
But the Federal Reserve has made it clear that they are not going to
raise Federal Reserve funds until mid-2013 – so I think at least from
that perspective we have at least a positive climate in the near to
medium term.
GEOFF CANDY: What are your near to medium term price forecasts?
JAMES STEEL:
We are looking for an average of $2025 for next year with a wide
trading range of $1700 to $2300 – the emphasis being on we expect highly
volatile markets. And I think that will be backed up by we get good
news. The risk on risk off scenario we've seen play out through the
financial markets is going to likely keep volatility in the gold market
very high.
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MineWeb, 09 Nov '11
Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb
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