Introduction of the Gold Market Forecast
· After the excessive gains in H1 2006, prices have been broadly consolidating.
· Concern is now focussed on how the financial markets will cope with a slowdown in US economy and a likely weakening of the dollar.
· How will foreign creditors react to this, will they reduce their dollar holdings?
· Industrial demand for precious metals is sound and new high- tech applications should provide good ongoing demand and support for prices.
· But above all investment interest is likely to remain the bullish factor.
The bull market in Gold started to accelerate when prices rose above $460/oz in September 2005. The rally was seen across the commodities and was mainly driven by aggressive fund
buying. Between September 2005 and the end of January 2006, prices rose 25%, but after a short pause in Q1 06, the rally accelerated again. Indeed the March to May 2006 rally saw prices rise from $533/oz to $730/oz, a 37% increase. The move was spectacular, but there was little doubt that the rally had also run ahead of itself and the gains would not be sustainable. As it turned out, the speed and extent of the increase seemed to unnerve even those involved in it, which led to a sharp sell-off as funds reduced exposure across the markets. This led to a 25% correction back to $543/oz and signalled the end of a phase of the rally that had up until then been almost a one-way-bet.
If the first part of the year was a one-way bet, the second half was characterised by volatile gyrations as the market tried to consolidate. This led to an extended period of sideways trading in a wide range between $540/oz and $680/oz. The price oscillations have, however, created opportunities for all sectors of the market, with good trade and investment buying seen into the dips below $600/oz, while the rallies have provided range trading opportunities for the more speculative element of the market.
Factors driving Gold prices
- oil price
- jewellery demand
- US Central Bank Official Sales
- De-hedging
- Investment demand gains market share in India
- Political Uncertainty
- Long term investment buying
- The future markets
Conclusion
Overall the trends in the Gold market that have been influencing prices over the past few years are expected to continue. These include concerns over dollar weakness and the state of the US economy, the level of geopolitical unrest and how this could impact oil prices and the potential for investment interest to carry on growing. Out of these, the greatest concern is now focussed on how a slowdown in the US economy will affect the dollar and the mass of investments that are dollar based. With the rapid expansion in hedge funds, combined with the asset price acceleration over the past few years, the financial markets could be in for a volatile time. As such we feel the Gold will play and increasingly important part in the financial markets in the year ahead. This is especially so now that the ETF has opened the Gold market up to a much larger pool of potential investors.
Overall therefore now that the excessive gains from the March to May rally have been consolidated, it looks as though Gold prices are trending higher again. As such dips are expected to attract good buying interest from investors and trade buyers and we feel the up trend will resume. Although there is likely to be considerable resistance on the way up, we feel that prices will trade back above $700/oz again next year and may even spike over $800/oz. However for this to happen would require the dollar to weaken significantly, but an economic slowdown may be the trigger that brings that on. Over the past six years the average percentage gain from one year’s high to the next has been 19%. If this trend continues then it would mean prices reaching $868/oz. Overall we expect trading to spend most of 2007 in the $590/oz to $750/oz range, although spikes above $750/oz would not be out of the question.
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