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GOLD ANALYSIS

With so much uncertainty, why is gold not trading higher?

As the possibility of a Greek exit looms large and US debt remains unruly, why is gold behaving as it is?

Author: Geoff Candy
Posted: Wednesday , 23 May 2012

GRONINGEN (MINEWEB) - 

As newspaper front pages around the world start considering the possibility of a Greek exit from the euro zone, investors are beginning to do the maths as to what the financial fallout is likely to be. And, by most calculations, the numbers look fairly bleak.

But, while the outlook for Greece and, indeed, other parts of Europe is concerning, many gold investors are scratching their heads and trying to figure out why the metal is not acting as much like a safe haven as many were expecting it to.

Speaking to Mineweb.com's Gold Weekly podcast, Vulpes Investment Management, Investment Advisor, Grant Williams, said, "where we are right now is far more bullish for gold than I think it really has been at any time in that 11-12 year run."

Not only are the problems in Europe growing but, demand from Asia is growing as well.

And, he points out, the falls seen recently aren't actually too bad, especially when viewed in yen and euro terms.

"People tend to look at gold as a dollar based instrument and yes they say it hasn't really done what it is supposed to do," he says, but, "It's off 15%, that's a perfectly healthy correction in a strong bull market that we've seen."

Williams is also quick to point out that when most people refer to the gold market they are referring to the futures traded on the Comex rather than the actual physical commodity.

"What we are seeing on the physical market, particularly here in Asia, is tremendous demand particularly out of China. If you look at the Chinese imports from Hong Kong, they are up tenfold some months... when you've got someone like China increasing their purchases tenfold and now currently buying about 35% of global mine production and the price is going down that's unsustainable in a physical commodity. If demand increases, by that much, supply stays the same, the price cannot go down, certainly not in the long term."

For Williams, it is this disconnect between paper gold and physical gold that is the key to understanding the gold market at the moment.

"The physical commodity, cannot be printed, it cannot be fashioned out of thin air by central governments who want to manufacture more and ultimately it will have its say."

And, he adds, "Now that day, I think, is rapidly approaching and don't forget it's not the case that the dollar and gold cannot come together. Yes the dollar has caught a bit recently because of the trouble the Euro's had and people tend to sell futures in the gold market when the dollar is strengthening but all we are seeing in Asia are premiums increasing on the physical underlying."

For French bank Natixis, while a Greek exit has the potential to boost the gold price, there are other factors in the short term that have a bigger say.

In a recent note, the bank writes, "We would suggest that there might need to be two hurdles to overcome before the European crisis might become positive for gold prices once again. First, the difficulties would need to be perceived as a risk to Europe as a whole, and not just a problem for Greece. Second, there would need to be question marks over the dollar's continuing role as a safe-haven. For a European fiscal crisis to precipitate a significant rally in gold prices, this would therefore need to be accompanied by some risk of a US crisis as well. This could be a fiscal crisis similar to Europe's problems, or an economic one that prompts the Fed to embark on a third round of QE.

If Williams' view is accurate, a Greek exit without a larger European crisis is nigh impossible.

"The dominos in this particular space are extremely close together and as soon as one starts to fall a lot of them could fall, but there is no way Greece can reasonably stay in the Euro. I think now it's a case of the Greeks wanting to leave but they want to take as much money as they can before they leave and I think they realise it's inevitable. I think the rest of Europe realises that it is a bad policy to keep them in but until they can ring-fence their own banking systems it's kind of better the devil you know."

A UBS comment on the other hand is less certain of a Greek exit but, equally sure that confusion will stay the order of the day.

"As uncertainty mounts leading up to the June 17 Greek elections, we're more inclined to bet on a higher gold price but a Greek exit, while most likely fuelling considerable physical gold demand in Europe, could spark a sizeable deleveraging and dis-investment in financial markets. The paper gold market would not be immune to this selling," it says.

Adding, "Should a Greek exit not materialise - which is the UBS view - this doesn't mean calm will automatically be restored as a Greek debt restructuring is highly likely and this should support gold. The only thing that we can be certain of ahead is uncertainty."

ipad version: Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh: REUTERS/Ajay Verma

Tags: mining, metals, mining and metals, greece, gold, investment

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MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Managing Editor, and we will include you in our editing and expanding on our stories. Email him at geoff@mineweb.com

10 May 2013


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