Gold can still make new highs without QE springboard
Despite gold having fallen Wednesday after the US Fed showed no sign of continuing market-sweetening bond purchases, investors and analysts say emerging market demand for the metal will sustain the gold bull.
Posted: Friday , 02 Mar 2012
LONDON (Reuters) -
Gold can still make new highs this year, even as the Federal Reserve shows no sign of continuing market-sweetening bond purchases and the European Central Bank hints it won't supply any more half-trillion euro sugar rushes.
Gold lost nearly 5 percent on Wednesday in its biggest-one day fall since mid-December after Fed Chairman Ben Bernanke issued a downbeat assessment of the U.S. economy, but did not spell out that there would be more quantitative easing, the anchoring of bond yields through government debt purchases.
The ECB, which has loaned over a trillion euros in two roughly equal-sized portions of low-rate, highly-attractive cheap cash to commercial banks to encourage lending and avert recession in the euro zone, has warned the financial sector not to get hooked on these offerings.
Low interest rates and ample liquidity provide a favourable backdrop for gold, which can thus compete more effectively for investor cash against stocks, bonds or currencies that bear yields or dividends that can be eroded by loose policy.
Gold has doubled in price since the Fed embarked on its $2.5 trillion bond-buying spree in late 2008 and is still up 10 percent so far this year around $1,720.00 an ounce, further underpinned by the U.S. central bank's commitment to leave rates unchanged until at least late 2014.
So the risk of losing this central bank liquidity fix has unsettled the markets, but investors and analysts say low rates, stubborn inflation, along with central bank purchases and emerging market demand for the metal will sustain the gold bull.
"What is more important with regards to gold is real interest rates are negative and this is the key issue that we have to look at. (A switch in ) this factor will probably signal the end of the bull market in gold and our view is that we are still some way from this point because inflation is a problem and interest rates are very low," Richard Davis, a portfolio manager at BlackRock, the world's largest asset manager, said.
"There is a good inverse correlation between real interest rates and returns on gold bullion. Once interest rates get to +4-5 percent, then the annualised return on bullion goes -10 to -15 percent per annum," he said, adding: "In theory, you could argue is less QE is bearish for gold in isolation but there are many other factors there that are positive for gold."
Real interest rates, which factor in the rate of inflation, are negative in 12 out of 20 of the world's richest nations and are most negative in the United States and the United Kingdom, both of which have employed QE to boost their economies and have near zero nominal interest rates.
Real U.S. interest rates are -2.75 percent, compared to the G7 average of -1.76 percent and compared with a G20 average of -0.26 percent. Beyond the G7, the other members of the G20 have an average real rate of interest of 0.44 percent.
"There is quite a distinct possibility that we will see highs above $1,900. It won't take it a lot to get back to those levels and I certainly wouldn't be surprised to see gold going to a new high and going to $2,000," Davis said, adding this was not BlackRock's own forecast for the price.
DUAL DOLLAR THREAT
The U.S. dollar has posed a dual threat to gold in the last six months. Firstly, it has been a more compelling safe haven for investors seeking an alternative to the euro and secondly, its inverse relation to gold means its own fluctuations will have more relevance for the bullion price than fluctuations in investor risk appetite.
"We are at a point where Fed policy is becoming much less bullish (for gold), but I don't think it's outright bearish," Michael Lewis, an analyst at Deutsche Bank said.
"It just removes what was a quite powerful tailwind for gold but we still have a very low interest rate environment, even though the liquidity injections are disappearing," he said, adding that his bank's view remained bullish for gold, particularly from the second half of this year."
Deutsche Bank, among other things, expects to see job creation slow in the United States, which would drag on the dollar and boost gold, especially if a pick up in inflation drives real interest rates even lower.
Anne-Laure Tremblay, a precious metals strategist at BNP Paribas, said with, or without QE, real rates would remain negative in the United States and elsewhere this year and Bernanke's lack of explicit signal for more money-printing would not spell the end of gold's 11-year rally.
"It's not a game-changer. The absence of another round of QE in the U.S. would definitely be a bit less positive for gold, but it would not materially affect gold's upward trend," she said.
"We assume that gold prices will peak when the Federal Reserve and other central banks begin a monetary tightening cycle."
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