16th April 2013
Gold may have overshot on the downside amid fears about the Cyprus sell-off and related concerns that other EU countries may follow suit to reduce their deficits according to a note from HSBC Private Bank
The bank notes that gold has corrected sharply in the past few days, falling from USD 1560 / oz to an intra-day low of 1322 in just two days.
The note adds: “Concerns over the impact of gold sales by Cyprus, and potential sales by other Eurozone nations to reduce their deficits may be exaggerated in our view, but weighed on sentiment.”
It says that gold has increasingly been trading as a cyclical asset and showing a high correlation to other commodity prices.
“As copper and other commodities fell as a result of weaker-than-expected Chinese data yesterday, gold fell with it. Increased margin demands imposed on gold traders at the Chinese exchange may have contributed to risk reduction and exacerbated the move, while stop loss orders further amplified the move, especially after the USD 1540 / oz support level was broken,” the note adds.
The bank says that gold prices should find a floor around current levels but may struggle to advance in the short term, as USD remains well supported and investors digest the volatility and some may potentially scale back their holdings.
However, it believes there will be a gradual improvement of prices in the medium term, albeit from a lower base. Global liquidity should help inflate asset prices and support the case for real ‘hard’ assets such as gold. “We also think that global growth will recover in H2, and this should help commodity prices, including gold. Moreover, the balance between gold mining and scrap supply against jewellery demand should start to become more positive at current levels. Finally, we think that central banks, especially in emerging markets, will continue to show interest in gold for diversification purposes and may take advantage of the recent fall to add to positions. In our view, this should offset some of the reduction in demand from ETFs and global asset allocators which may occur.”
We continue to see value in gold as an asset class, as central bank policy and the global sovereign debt challenge are in unprecedented territory. Although we believe that the global economy and risk appetite should see
support in coming months, new tail events could occur and gold should act as an insurance against such events.