Staying on a roll

Price con­tin­ues to hit new records on back of global fi­nan­cial may­hem

Finweek English Edition - - INSIGHT - BREN­DAN RYAN bren­danr@fin­

GOLD BLASTED THROUGH US$1 600/ oz last week and two of the most au­thor­i­ta­tive fore­cast­ers on the metal – GFMS CEO Paul Walker and Dun­deeWealth Eco­nom­ics chief econ­o­mist Martin Muren­beeld – are call­ing it higher still. Walker says: “It wouldn’t sur­prise me to see gold go to $1 700/oz and it could eas­ily spike to $1 800/oz be­fore this debt mess is fi­nally sorted out.”

Muren­beeld pub­lished his lat­est quar­terly as­sess­ment of the gold mar­ket last week. He de­scribed his find­ings as be­ing “our most bullish fore­cast yet. A $2 000/ oz price is in sight for next year.” Muren­beeld al­lo­cates a 35% prob­a­bil­ity to that hap­pen­ing, point­ing out his most likely “prob­a­bil­ity weighted” pre­dic­tion is for gold to hit $1 822/oz next year.

There are two key fac­tors to be kept in mind here: these pre­dic­tions are com­ing from the “con­ser­va­tive” end of the gold spec­trum from fore­cast­ers who have been right far more of­ten than they’ve been wrong over the past five years.

Where Muren­beeld has missed on his calls it’s been be­cause he was too cau­tious in his price rise pre­dic­tions.

Walker for years was known as gold’s “big bad bear” due to his per­sis­tent warn­ings about the threats that could de­rail gold. But he’s changed his tune dra­mat­i­cally this year and moved firmly into the “bull” camp – al­beit still with some caveats.

The other fac­tor is gold is hit­ting new highs dur­ing a pe­riod tra­di­tion­ally quiet for the metal. The old in­vest­ment adage “Sell in May and go away” ap­plies to gold just as much as it does to eq­ui­ties. July/ Au­gust is the main hol­i­day sea­son in the north­ern hemi­sphere, when all its “movers and shak­ers” knock off and the mar­ket goes quiet. Gold usu­ally turns down but picks up again later in the year when the im­por­tant In­dian mar­ket for phys­i­cal gold be­gins to again buy around Septem­ber/Oc­to­ber.

Both fore­cast­ers cite the on-go­ing debt and fi­nan­cial crises in the United States and the Euro­pean Union as the prime driv­ers be­hind gold’s cur­rent rush. Walker says noth­ing has changed since his pre­sen­ta­tion of the GFMS an­nual gold re­view in Jo­han­nes­burg in April. At the time he cited the un­will­ing­ness by the gov­ern­ments and cen­tral banks of the US and Europe to “grasp the net­tle” and tackle the fall­out from the global fi­nan­cial cri­sis head on as the main rea­son for his con­ver­sion from gold bear to gold bull. Walker now com­ments: “Un­til the US comes up with a cred­i­ble debt re­struc­tur­ing pol­icy that deals with its ran­cid bal­ance sheet, and un­til Europe gets its act to­gether in the face of its debt con­ta­gion, you’ll see this bull gold mar­ket sce­nario con­tinue to play out.”

But Walker again sounded his warn­ing the mar­ket will at some point turn, the key fac­tor be­ing when real in­ter­est rates again turn pos­i­tive. “Cen­tral banks con­tinue to keep longterm yields low de­spite the fact that the rea­son we’re in this mess is long-term yields were kept too low for too long. The sit­u­a­tion is un­sus­tain­able.”

How­ever, Muren­beeld com­mented: “This week there was con­fir­ma­tion of some­thing most of us had de­duced: the Fed stands ready to adopt more mon­e­tary stim­u­lus should the eco­nomic sit­u­a­tion war­rant it. The US Fed­eral Re­serve’s cur­rent view is it isn’t war­ranted.”

That’s a ref­er­ence to what’s known as QE3 – a pos­si­ble third round of quan­ti­tive eas­ing through which the Fed could pump yet more money into the US econ­omy.

Walker com­mented in April: “Should there be a QE3 then all bets are off and I’d go out and buy gold.”

PAUL WALKER AND MARTIN MUREN­BEELD On the same side for once

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