Gold shows signs of regaining its allure

Near-term sentiment for precious metal may be on rise again, writes Brendan Ryan

THE gold bulls are starting to get restless following last week’s decision by the US Federal Reserve to keep its quantitative easing bond-purchase programme but we are a long way from a “stampede” back into precious metal equities.

Some South African and foreign analysts appear more upbeat on prospects and the positive sentiment is likely to be reinforced this week by news from the world’s premier “supply side” gold mining conference — the Denver Gold Forum — which started in Denver, Colorado on Monday.

JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke commented in their weekly gold review published on Friday that: “While uncertainty persists in SA in terms of wage negotiations with the Association of Mineworkers and Construction Union we believe the near-term investor sentiment around the yellow metal may have improved post the Fed’s announcement.

“We expect the news flow around the gold stocks to increase next week as the groups present at the Denver gold show. We believe it could lead to increased volatility in the sector over the next few days.

“So, a reasonably good outlook for gold demand in the near term with low interest rates boosting investor demand and low-metal prices boosting physical demand,” the analysts said.

According to gold market expert Martin Murenbeeld, who is the chief economist for Toronto-based financial institution DundeeWealth, the decision by the Fed not to “taper” its quantitative programme by an anticipated $5bn-$10bn a month took everybody by surprise, including himself. In his weekly review, Dr Murenbeeld said: “The markets were also surprised; gold shot up $60, US treasuries surged and US equity markets rose to new … highs.”

He said the implications for gold following the Fed’s action were that “quantitative easing will carry on for longer than we thought — likely past mid-2014.

“Interest rates will stay lower for longer. Inflation is expected to only slowly return to 2% which will also delay the eventual hike in the Federal Funds rate and US fiscal legislation this (US) fall is

The markets were also surprised; gold shot up $60, US treasuries surged and US equity markets rose to highs

highly uncertain and the Fed wants to be ready to support the economy in the event there are problems.

“These takeaways are bullish for gold,” Dr Murenbeeld said, but he remained cautious in his price predictions.

“The best thing we can say is that we are cautious, and only marginally bullish.

“We continue to believe that the upside for gold has opened up now that the hectic selling of exchange traded fund (ETF) gold has subsided but we would be remiss in not pointing out that ETF selling did pick up again in recent days.”

Dr Murenbeeld’s “wide range” gold price forecast remains from $1,200/oz to $1,475/oz, and his overall assessment is that the “baseline projection shows only a very mild uptrend”.

However, other economists are far more pessimistic in their outlook for the precious metal.

According to a Bloomberg report, Citigroup analysts Ed Morse and Heath Jansen believe that the Fed’s surprise decision to maintain stimulus for now will benefit gold prices only in the short term.

The analysts added the gold price could drop below $1,250/oz before the year end as economic data strengthens and investors expect the Fed to start reducing its asset purchases.

“The postponement of the tapering decision by the FOMC (federal open market committee) represents only a short-term reprieve for gold.

“Does this mean the end of the downtrend in gold?

“In our view, the fundamental and clear answer is no,” Citigroup analysts said.

According to JP Morgan Cazenove the JSE gold index rose 6.2% for the week ended September 19 led by AngloGold Ashanti ( up 8.2%); Sibanye Gold (up 9.2%) and Pan African Resources (up 13.2%).

While the dollar price of gold has shot up, the South African miners get paid in rand and the recovery of the South African currency against the dollar in the past week has worked against the local gold producers.

The rand gold price on Monday was trading at about R419,000/kg compared with R426,000/kg last Thursday and R423,000/kg on September 12.