2nd July 2013
Nicholas Brooks, Head of Research and Investment Strategy, ETF Securities says he expects a rally in gold prices given that the reaction in bond markets to Federal Reserve tapering has been overdone.
“We believe the reaction of bond markets to Fed comments has been overdone, and ultimately real rates will fall from current levels, driving a rally in the gold price”, he says in a note published this week.
Brooks says: “All good bull markets need a correction. After a twelve year run, the gold price was well overdue a major correction and this is now taking place, albeit at a much higher velocity than its increase – as is usually the case. The silver price has been dragged down with gold, and platinum and palladium prices have been affected by China growth concerns as domestic liquidity has been squeezed. We believe the price corrections have been excessive and have returned precious metals prices to attractive long-term accumulation levels.”
“On our estimates, gold, silver and platinum with implications for palladium are now trading around 20%, 10% and 25% below their respective average marginal costs of production. Prices will have to move above these levels to support long-term supply growth.”
Brooks also points out that short gold futures positioning is at an all-time high and silver shorts are now at over 10-year highs, indicating scope for powerful short covering rallies once fundamentals improve.
He adds that physical gold buyers, notably in China, have increased purchases as the price has dropped.
“While precious metals prices will be driven primarily by macro and technical factors in the near-term, we believe that at current levels they provide attractive value for long-term investors.”
Meanwhile another firm BullionVault says private gold investor sentiment remained steady last month from May according to its latest Gold Investor Index.
The Gold Investor Index measures the balance of buyers and sellers on BullionVault.com’s online gold exchange, which it says, acts as a clear indicator of how private households are reacting to economic and financial news.
A reading above 50 on the index means suggests there were more gold bullion buyers than sellers, showing that gold’s appeal remained positive overall.
The index remained at 53.0 in June, unchanged from May. It peaked at 71.7 in September 2011, and hit a 16-month high of 58.6 in April.
Adrian Ash, BullionVault.com’s head of research in London, says: “June’s torrid price action led some long-term holders to take profits, and it led some more recent buyers to realize losses too. But other people are taking this opportunity to buy gold near three-year discounts.”