© Nick Trevethan
|
Nick Trevethan
Senior Commodities Strategist at ANZ Research, Singapore
XAU/USD
Our assumption for gold is that we will see stronger prices in 2012, but there are certain issues in the gold market that are going on right now. We have noticed quite sharp sell-downs for gold at the end of Q3 and at the end of Q4. It means that the prices actually come down quite rapidly in the last few weeks of September and we also saw them dip in December last year. Basing on this observation we consider these descents being related to fund redemptions.
There is a number of equity funds out there that are exposed to gold. The main is the Paulson hedge fund where you can either invest in the hedge fund in US Dollar terms or you can actually invest in gold terms. The hedge fund managers then buy into the SPDR as the way to hedge the gold thrusts, thus to hedge the exposure to the gold market. We have seen some significant reductions in the SPDR holdings during September 2011 and also to a less extent in December last year. What is happening is that you are getting relatively high prices during the quarter, but then at the end of the quarter it all comes down as the SPDR's holdings are reduced. We assume that this is going to continue at the end of the Q1 this year and potentially at the end of the Q2 as well.
Our price profile for gold does not look that aggressive, but we are forecasting only end of quarter prices. We think the prices are most likely to get higher in the middle of each quarter as a result of hedge fund redemptions flowing out of ETFs.
We are quite bullish on gold. In the Q1 we expect gold to end at $1650 an ounce, then $1730 an ounce in Q2 and escalate by the end of the year to $1850 an ounce. We see gold prices surging by about $200 this year between the end of the Q1 and the end of the Q4. According to our estimates prices will likely peak in Q1 next year, where our end quarter target is $1900 an ounce.
But there is a good chance that it could take out record highs on strong demand in China and India, emerging Central bank demand. There is also a feeling in certain parts of the investor community that it is good to have some kind of physical holdings to diversify a paper portfolio.
There are a lot of good reasons why people are still looking at gold. If we take China, its demand for gold is incredibly robust. When you look at, for example, imports into mainland China from Hong Kong, which is a major gateway for gold, the amount of imports was reported 103 tons in a single month in November. It is a staggering amount of gold. Chinese appetite is very strong and for several years we have seen negative real interest rates in China which makes people reclutant to put money into the bank.
That means purchasing power of bank savings in China decrease over time. For example, if you had put 100000 Yuan into a bank account in 2004 you would be able to buy today 96000 Yuan worth of goods and services because inflation has risen more quickly than interest rates. That certainly upsets Chinese savers, therefore Chinese authorities and banks are encouraging savers not only to put money into the bank, but also to have a more diverse portfolio. In this case, had you put 5% of the 100000 Yuan into gold and the rest in the bank, you would be worth 108000 Yuan. You would have more than offset the decline in real negative interest rates.
I guess what is interesting is, despite negative rates, China is a nation of savers, having nearly 35 trillion Yuan in household savings and if you translate how much gold is represented by even one percent - that is more than of gold mine outputs. Gold market is just too small to absorb the significant amounts of Chinese savings without a large move in prices.
The other strong pillars in the gold market are the Central banks purchases and the latest data shows very significant purchases. Mexico in the first 11 months of the last year bought about 100 tons of gold on their own and South Korea has been also a big buyer of gold. The European Central banks have typically been big sellers and were selling about 400 tons of gold each year, but they stopped doing that.
Exchange-traded funds in the past have been buyers of gold and so they have absorbed all the Central Banks' selling.
It is fair to say that we do not have the same level of ETF purchases that we have seen in the past. ETFs are still growing generally. There seems to be a bit of a switch away from the SPDR - the big US centric fund towards others, for example, European funds seem to be proving more popular. People may be worried about Dodd-Frank Rules and increasing regulation out of the US.