© Eugen Weinberg
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We have been positive on gold for quite a while on back of very low interest rates and continuing jitters on equity markets, as well as on the geopolitical issues and diversification by the central banks. It is not only that the investors from China, India and elsewhere are buying gold, but also the central banks moved strongly to the buying side of gold, hiking up their reserve by several hundred tons per year. Since this year we know also the official data from China, which also confirms previous statement.
Thus, that is why we believe that the gold prices are likely to increase also on back of low probability of immediately raising the interest rates in US, which has been weighting on the sentiment on a market. We are not too optimistic on gold in broader terms, but we are very optimistic especially in near terms, because we see here even a possibility for accelerated bond purchasing programme being decided upon the ECB.
Central banks, other than the Fed, are also influencing the price of gold. The World Gold Council reported Wednesday that central banks added 47 metric tons of gold to their reserves in August, following 62 tons added in July. China and Russia were the biggest buyers, and most analysts expect further official purchases to be one of several factors supporting the price of gold in the next few years. Do you share this outlook? What other factors in your opinion will influence gold performance?
That is definitely one of the reasons why we have "a put" on gold by the world central banks. Especially the central banks from emerging countries, which have been amassing higher gold reserve on positive trading and payment balances, are likely to continue to increase the share of gold and the absolute volumes of precious metal in their reserves. That is already a major reason, since we are talking about several hundreds of tons of gold.
However, there are also other reasons, and the most important one is that we see gold not as a commodity which is getting its value from the scarcity, but safe haven in a currency.As such it is likely to get more in demand by the investors looking for safe haven and protection of their capital against the asset price inflation. Thus, here we definitely look first of all for stabilization of the prices and, once they stabilize at a higher level, we are likely to see an increase in demand propping the prices even higher.
A rebound in inflation is one key factor that could drive the gold market higher. But most experts do not see that happening anytime soon, as US inflation has remained remarkably low for the past six years. Moreover, with commodity prices still under pressure combined with a strong US Dollar, there are concerns that inflation may go even lower, particularly if the Fed proceeds to raise interest rates in the near future. In your opinion, how big will be the impact of interest rates hike on commodity market and particularly on gold in case it takes place?
For my opinion, this event and its effects are overestimated and overvalued. In fact, last time the interest rates cycle happened in US, ten years ago between the year 2004 and 2006, the Fed hiked its interest rates from 1% to over 5%. During this period of time the gold prices rose by more than 60%. The reason for this was that the prices were already under pressure before the interest rate hike cycle. That is what we are seeing right now.
At the moment many investors are following the prices in expectations of the interest rate hike, and the prices are maximally under pressure. However, once the rate hike happens, it will not be a surprise anymore and this risk is already completely priced in within the current market environment. That means even if the rate hike is to happen in October, it will not have a massive effect on the prices and in fact it will mark even long term bottom in the prices. The reason behind it is that after this there will be no more risk of a lift off to be priced in, which was weighted on the prices before.
What is your forecast for gold price in the next one to three months and in the longer term?
We think that the prices are likely to stay around current levels and not fall strongly by the end of the year and even increase next year towards 1250 US Dollar and even stronger increase in the Euro, because we expect here a weakness developing against the US Dollar. However, in any case, even this not-too-optimistic forecast it is way above the consensus. In comparison with other market watchers who expect the prices to average somewhere between 900-1000 USD, we are definitely more optimistic and forecast the prices to increase.