ONE of the surprises in the current frothy and volatile gold market, which could see prices testing $800 by year-end and possibly knocking over a 28-year high, is the lack of producer hedging, Jessica Cross, CEO of metals consultancy VM Group, said on Friday.
Gold has gained nearly $100 from where it was a month ago and easily broke through the previous 26-year high of $730 reached last May. Spot gold prices reached $739 on Friday as the dollar drooped to record lows against the euro.
“We’ll test $800 by the end of the year,” Cross told Miningmx in a telephonic interview. Asked if gold could test the 1980 all-time high of $850 in nominal terms, she said: “I don’t see why not.”
“This is very frothy at the moment and there might be some profit taking and re-tracement in the next week or so, but it will form a base slightly lower than it is now to springboard to higher prices. The fundamental reasons for why it’s going up will still be around,” she said.
The higher prices will temper gold imports into India for jewellery manufacturing, which will meet its needs through the recycling of scrapped gold, she said.
The record-high oil price has meant petro-dollars are pouring into the Middle East region. Investors are wary of investing in a dollar, which could weaken further, which means there could be higher levels of gold buying in that region.
One of the positive factors for the gold price has been a massive de-hedging campaign by gold producers as they unwind contracts for gold sold a pre-determined prices in order to take advantage of spot prices few had anticipated.
A surprise is that producers aren’t locking in some of these high prices with forward positions, perhaps indicating there’s a belief in the industry that prices could stay higher for longer.
“Its surprising that some producers have not hedged at these levels. For those who don’t have anti-hedging shareholders I would, if I was a producer, look to cover my costs with some put options,” Cross said.
However, the question of whether these kinds of prices are sustainable is less easily answered.
“I have found the market difficult to call in the past year. When it broke through $600, I questioned it that was sustainable We don’t know what is sustainable right now. We haven’t seen a shakeout yet. We’d need to see profit-taking a sell off to evaluate where the physical demand underpins the price and forms a base,” Cross said.
There is, in the words of Barrick Gold’s CEO, Greg Wilkins, the perfect storm for the gold price, with falling interest rates in the United States, potential inflationary pressures with record high oil prices above $80/barrel and a weaker dollar.
"What we have is inflation plus lower interest rates, and that's not something that we've seen before, and I think that's going to be very bearish for the (U.S.) dollar, which is conversely good for gold," Wilkins told reporters in Toronto. “I think it's a perfect storm, to be quite honest with you."
VM Group is intrigued by the large imports of gold into India, which could be more than double the long-term average of up to 450 tonnes a year. “There’s something going on in India. Gold imports have been extremely strong this year and we suspect there is something going on over and above the usual jewellery buying,” Cross said.
“It looks like India is on track for 1,000 tonnes this year. We suspect it’s something internal to the market, a fiscal loophole or something that is encouraging the uptake of physical gold. We don’t think it’s sustainable, but it’s enormously supportive of the gold price,” she said.
VM Group, formerly Virtual Metals, anticipates another 50 basis-point rate cut from the US Federal Reserve before the end of the year. It cut rates by that degree this week, triggering a fall in the dollar and a surge in the gold price.
“I think they are going to ratchet rates down as they ratcheted them up. It's quite possible that there will be another one as we had this week before the end of the year,” Cross said. “It means the dollar price of gold will go up.”
Investors are buying gold as a safe haven for wealth because of the parlous US economy, analysts said.
"There has been substantial safe-haven buying. The dollar has weakened to record lows and we have revised our forecast up for oil as well. On the top of that environment, there is anticipation of slower U.S. growth momentum and Fed rate easing," Suki Copper, analyst at Barclays Capital, told Reuters.
"These factors are very supportive for gold and we see prices travelling even higher. The positive investor sentiment is very evident in the ETF positions and also in the Comex futures positions." she said.
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