Gold prices are likely to bump along the bottom for some time, says Tom Kendall, head of Precious Metals research at Credit Suisse.

Speaking on Mineweb‘s Gold Weekly podcast, he said the problem gold has at the moment, “is that even if you are an investor who believes that you should have a significant allocation to gold as a hedge against inflation or some other… risk hedge, you probably accumulated that allocation through 2009, 2010, 2011 and you don’t need to add to it at the present time, or until there is a feeling that there is a greater prospect of inflation on the horizon.”

He went on to say that, in order to turn around, the gold market will need to attract institutional investors back into the market.

“I don’t think it’s enough to rely on Asian demand to support the price – it hasn’t so far and I don’t think it will, it needs that institutional component to come back on the buy side. And that component is probably not going to come back until you see some kind of inflationary pressure emerging in the developed markets which seems a long way distant at the present time.”

At the very least he says, it will need other asset classes to begin to look much less attractive than they do at the moment. “The S&P 500 for example,” he says, “is up something between 15% and 20% this year and delivers a dividend yield of between 2% and 3% overall. You compare that to the performance of gold and it’s fairly obvious why institutions have turned away from the metal, given that they see little need for an inflation hedge at the moment.” 

“This to us is a bear market – there still seems to be a surprising number of participants who refuse to accept that, and yet when you consider a lack of tapering at the September FOMC meeting, the current debt ceiling issues and the downgrade overnight by Fitch of the outlook for US AAA and gold is still trading incredibly weakly, and those who are still claiming that this is a bull market need to go back and examine the facts.” 

Asked to reconcile this view with the significant level of buying seen in physical markets, particularly in Asia, Kendall replied: “With respect to India, physical premiums are extremely high, but they are that high because of the restrictions on imports which has led to a lack of availability of bullion in the local market and that’s not a bullish signal for the gold market. The fact that India is still 2.5 months on from the initial announcement of the 80:20 export regulation still unable to import significant amounts of gold is not a bullish factor.”

Looking to China, he says, demand remains at high levels but adds, “there is still a decent arbitrage that Chinese banks can benefit from importing and delivering into the local market, but the market certainly is not nearly as strong as it was during the first half of the year and the Chinese are as reluctant as any other buyer to buy heavily in a market which tends to be trending downwards.