Opinion pieces are the views of the author: they do not represent the views of FastMarkets
London 28/11/2013 – Tapering – for gold, it’s the buzzword.
It feels as if every single move in the gold price in recent months has been linked this single factor. If the price goes up, tapering fears are waning; if it goes down, the market must think tapering is imminent.
Let’s get this out of the way: the US Federal Reserve will start to unwind its $85-billion-per-month quantitative easing (QE) programme at some point in the near future, if not in December then definitely in the first half of next year, unless there is an economic disaster in the meantime.
But is this necessarily a bad thing for gold? I’d argue not.
Ever since gold failed to break through $1,800 for the third successive time in October 2012, the market has progressively priced in the end of QE and a return to normality, with the bulk of that adjustment coming in three unprecedentedly bad months for gold.
In April-June this year, the price dropped to a low of $1,180 per ounce from a high of $1,617, taking it deep into bear market territory.
This is not to say that there will not be a kneejerk reaction when the Fed releases its inevitable announcement.
But once US unemployment returns to 6.5 percent, the punchbowl is removed and the market has shaken itself back into place, then we can start looking at other – arguably much more important – factors driving the gold price.
First and foremost among these is still dollar risk. The US will still have an extraordinary amount of debt on its balance sheet. According to this (admittedly controversial) website, it last stood a fraction below $17.2 trillion.
Now, before I ruin my American friends’ turkey dinners, I’m not singling them out unfairly. From Beijing to Brussels via Athens and Argentina, everyone is at it.
The last time I checked, one of the easiest ways to get rid of local-currency-denominated sovereign debt is to inflate it away. And crypto-currencies notwithstanding, gold is still the leading hedge against inflation. Just ask your local central bank.
But sovereign debt and inflation risks are far from the only games in town; physical demand is also strong.
Sure, India has worked hard to curb its current account deficit at the expense of gold but any trader on a street corner in Mumbai will tell you that brides still want to be adorned with glittering gold.
And while third-quarter imports were much weaker than expected, this followed a large spike in demand in the second quarter when prices were lower. Among others, the World Gold Council has speculated that this was pre-emptive buying on the aforementioned price drops.
And let’s not forget China, where price declines trigger bargain-hunting en masse. China’s per capita gold ownership is still far below western levels – some analysts have pegged it at about $30, with that of the US above $1,100.
But this ignores the supply side. And there is no getting away from the fact that the world produces more of the metal than it consumes – for now, at least.
At current prices, many producers are feeling the pinch and will seek to mothball some of their less profitable operations.
And at the point where supply constricts to meet demand and QE is a fading memory, we will again see the fundamentals in full flow.
(Editing by Mark Shaw)