Gold’s performance last week, in the face of a drop of around 30% in the price of silver was rather impressive and, could be an indicator of things to come.
According to UBS precious metals strategist, Edel Tully, the bank prefers gold to silver over the course of the rest of this year even though silver offers perhaps more opportunities for short term gain, albeit with a heightened risk profile.
Speaking on Mineweb.com’s Gold Weekly podcast, Tully said, “Gold, purely from a precious metals and a safe haven angle, is our preferred method…. Obviously silver has come back quite impressively, it is up over $5 from the lows of last week so you could have made some big gains but, I would prefer to see silver try to stabilise somewhat, see it consolidate for a little while.
Tully adds that, while she does see a $50 an ounce silver price as quite possible, “the route back up to $50 is going to be alive with very volatile price action.”
Gold, on the other hand, is likely to be a less volatile play, to which the movements of last week attest but, it also expected to continue on its upward trajectory.
“Our average gold price for the course of this year is $1,500, so it is just a tiny bit below where gold is trading right now, so I think a gold price above $1,600 this year is very, very possible,” Tully says.
One of the main reasons for this is the slate of continued macroeconomic concerns facing countries around the globe.
Inflation concerns in China, which Tully acknowledges is a very important market for gold, have further boosted demand for the metal.
“Whenever I go to China, the actual view on inflation appears to be much higher on the ground than what the official statistics would reveal. So, I think the Chinese population will remain friendly toward gold so long, really as inflation is a problem.”
Remaining in Asia, Tully adds that the current level of demand out of India is surprisingly strong and does not have the same level of seasonality as it has in previous years.
“While you are not going to have the wedding-type buying that happens in the beginning of the year, there certainly seems to be an appetite for gold in India that is not going to disappear over the summer,” she says.
The upcoming end to QE2 in the US that is scheduled for June, is also likely to have some impact on the price of gold even, as Tully says, it is just from a psychological view. But, she adds, the end of the quantitative easing programme does not mean necessarily a tightening in US monetary policy.
“US monetary policy is going to remain loose for some time, hence the backdrop for a rising gold price, or at least a stable gold price remains the case. Add into the mix then, a very uncertain US fiscal backdrop and it certainly is a number of interesting variables that will help to make sure that gold continues to be supported by investors.”
The final major factor that is likely to play an increased role in underpinning gold prices over the course of the year is the continued presence of central bank buyers in the market.
In particular the news last week that Mexico has bought 93 tonnes of gold, while not a big mover of the price on the day of the announcement bodes well for the rest of the year.
“I think the biggest take-away we can grab from that is that another region of the world, another central bank region is buying gold. So, it is not just concentrated in Asia, that it is now in the Americas. So, the potential for another central bank in South America perhaps could be quite high going forward.”
And, she says, “I think over the course of the year it is just another explanatory factor in why gold should move higher from here.”