GOLD ANALYSIS

Gold to average $2025 an ounce during very volatile 2012 - HSBC

HSBC analyst, James Steel says the group expects the yellow metal to trade between $1,700 and $2,300 next year as safe haven buying returns and the risk on, risk off scenario continues

Author: Geoff Candy
Posted: Wednesday , 09 Nov 2011

GRONINGEN - 

Last week, this reporter asked the question, have investors revoked gold's safe haven status? And, in keeping with the volatility that has characterised the global political and economic spheres, the answer seems to change rather frequently.

HSBC analyst, James Steel, speaking on Mineweb.com's Gold Weekly podcast, explained that "For a while, gold was trading more with risk instruments.  That's to say that as risk came off and equity markets for example weakened, gold would decline. And when risk appetite increased and equity markets rallied, gold tended to rally as well."

The yellow metal, he added, "seemed to be more influenced by the way the currency markets were reacting or other markets than as a safe haven."

This, however, he believes has changed, and gold's safe haven properties have begun to re-emerge in the eyes of investors as the situation in Europe continues to deteriorate.

"Gold is subject to a myriad of factors and it's not always primarily driven by safe haven demand although I think as we speak that is the primary focus," he adds.

Part of the reason for this he believes is that the metal is a tried and true protector of wealth over many decades.

"If you look at what the core issue is right now, it's confidence, be that confidence in the United States, confidence of investors in Europe, in Japan and the decline, or the erosion I should say in confidence in the financial markets or in elected officials even as one can see from low popularity ratings for most of the elected OECD officials.  That has traditionally been a boon for gold and I think that's the current climate that we find ourselves in."

Steel says that, while continued uncertainty in global markets will likely be good for gold, if a solution is reached the restoration of confidence could undermine the metal.

"If you look at this longer term, we've had one form of crisis or another since the middle of 2007.  What started off as a local North American sub-prime mortgage crisis, morphed into a US credit crisis, into a global financial crisis, into a global economic crisis and by the beginning of 2010 it did become a sovereign risk crisis.  So we've really had five incarnations of this crisis - and each time gold has rallied a couple of hundred dollars so it shows that gold has over the long run fed off this crisis."

That said, Steel does expect any drop in demand from the West will be " well cushioned by emerging market interest in gold" because "China and India, given their long run projections of increased income and their greater weight in the world, are an important factor in sustaining a long run bull market."

For 2012, HSBC is looking for an average of $2025  with a wide trading range of $1700 to $2300, Steel says. "The emphasis being on we expect highly volatile markets. The risk on, risk off scenario we've seen play out through the financial markets is going to likely keep volatility in the gold market very high.