Gold rises from July’s lows but caution is urged

Boardroom-Business-Chair-Executive-Corporate-700x450.jpg

Despite a bounce in the gold price since its recent low there are plenty of reasons to remain cautious on the yellow metal going forward.

The price of bullion has risen some 14 per cent since its early July low and is now trading back above the $1,400 per ounce mark on the back of a number of positive drivers.

Its recent bounce reflects a revival of safe haven demand due to geopolitical risks, such as the unrest in Syria. Capital Economics head of commodities research Julian Jessop.

“Even if this crisis eases soon, gold could gain further support from uncertainty generated by the upcoming skirmishes over the US debt ceiling and by the elections in Germany,” he adds.

However, Jessop is wary of putting too much emphasis on these political risks as two other factors should ultimately prove more important for gold. The first is the outlook for monetary policy in the advanced economies.

The prospect that the Fed will start to reduce its asset purchases later this year has failed to give the dollar the boost that many had anticipated, mainly because US interest rates are still likely to stay low for an extended period. In the meantime, the rise in government bond yields has paused, reducing another major headwind for gold.

The second factor is strong underlying physical demand, which led by China and India, surging in the three months to the end of June. But this was not enough to offset the collapse in demand from Western investors.

Jessop says he is not about to get carried away on the upside for gold eithe: “US real yields should still trend higher over the next few years.

”The downside for gold could be limited by increased volatility and renewed weakness in the prices of traditionally riskier assets like equities. But a rise in bond yields and eventual increase in official interest rates will increase the opportunity cost of holding gold.

“What’s more, gold prices also appear to have benefited recently from renewed optimism about the prospects for global growth. This is reflected in the pick-up in the prices of base metals and the fact that the price of silver, more sensitive to industrial demand, has risen even further.

“This source of support could weaken if, as we expect, the global economic recovery remains sluggish.”

Overall Capital Economics anticipates that the price of the precious metal will trend higher in-line with the likely growth in global incomes. It has already topped the firm’s end-2013 forecast of $1,360 per ounce while it expects the metal to reach $1,440 by the end of 2014 and rise 6 per cent more to $1,530 per ounce a year later.

Gold has endured a torrid during period recent times, as its price slumped when the traditional drivers of demand, such as the strong greenback, all weakened or reversed. 

For some 93 weeks to the end of June, it suffered its steepest and longest downturn in two decades, losing in the process a massive 37 per cent of its value since reaching an all-time high of $1,927 in September 2011.