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Middle East unrest come to gold market's rescue - VM Group

With no one yet able to predict the outcome of the developments in the Middle East and North Africa, safe haven buying and a wait-and-see attitude likely to prevail

Interviewer: Geoff Candy
Posted:  Wednesday , 02 Mar 2011
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GEOFF CANDY:  Welcome to this edition of Mineweb.com's Gold Weekly podcast and joining me on the line is Carl Firman, he's a metals analyst at the VM Group.  Carl there's been a lot of talk about what's been going on in the Middle East and in North Africa - clearly there's a lot of safe haven buying within the precious metals space, both in gold and silver.  If we look at the gold market at the moment though, how much of this is safe haven buying and what are we likely to expect going forward?
CARL FIRMAN:  The issues in the Middle East and North African regions have actually come to the rescue of the gold market.  In January it looked as though the gold price was perhaps on more of a sustained decline, but by the end of January with these geo-political concerns, the gold price has made quite a significant rally upwards, and that is based purely on the fact of concerns of oil supplies that would relate into our food prices, higher inflation and therefore higher risk of further political upheaval - again uncertainty in global growth - higher oil prices will dampen global growth and that increases gold's uses, in ... and stored wealth.  That's really what we've been seeing.
GEOFF CANDY:  Is there not a concern though potentially from a gold bull point of view that gold should be doing more at the moment given the geo-political concerns and the fact that it isn't, could potentially mean that we're reaching a peak?
CARL FIRMAN:  At the moment it's seems to be trading - it's a wait and see attitude and nobody - not I, not anyone - can actually predict what's happening or going to happen in the Middle East region and MENA region, so it's really a wait and see - there'll be spates, days, weeks where the confidence may turn, the gold price may ebb off and then along comes another protest or a further deepening of protest in another jurisdiction and the gold price will rise again.  And what you're likely to see is a lot more gold scrap exports from fairly or less volatile countries.  I know we've had problems in Tunisia, but there's been a big influx of Libyan refugees into Tunisia and you're likely to see a lot more gold on distress selling from refugees - therefore you're obviously going to see a lot more scrap gold which you could say is actually a bit negative because of increasing gold supply but on the other hand you're seeing a lot more safe haven demand which can offset that.  And that's why you're seeing this wait and see attitude at the moment.
GEOFF CANDY:  Sure - talking about inflation and clearly higher oil prices - higher food prices are likely to fuel inflation and potentially see an increase in interest rates sooner rather than later...
CARL FIRMAN:  Yes, the higher oil prices will impact US growth.  Just recently the US Federal Reserve predicted the US GDP would grow as much as 3.9% this year.  If the oil price continues to rise or even stays at these high levels at the moment, you'd likely see that prediction come off slightly.  And that is actually positive for gold - not so for equities, not so much for industrial metals either because the effect of higher oil prices will also filter into the emerging markets as input costs grow - so that will be difficult.  In the short term, as inflationary hedge yes, gold is tenuous - the relationship between gold and the inflation overrule gold use as an inflation hedge but that would put pressure on governments to perhaps raise interest rates, which again is negative for the gold price.  So it will be interesting to see how this plays out over the next two years.  But in the short term, in the next six months or so, you're not going to see interest rates rise, and it's going to be very much interplay between confidence in global growth and fears of uncertainty in this geo-political unrest and the oil prices.
GEOFF CANDY:  Where does then gold get placed within that spectrum...
CARL FIRMAN:  It was the ultra-hedge - safe haven place - if you have worries you buy gold - if your confidence rises, sell the gold and buy something more risky, buy an equity, buy an industrial metal.
GEOFF CANDY:  That being said, if we look at the data that's just come out of the SPDR Gold Trust, it's the fifth consecutive month that we've seen holdings fall within that ETF.  Is there a change in the type of ownership that we're seeing on the gold ETF front - is that something that we should be looking at?
CARL FIRMAN:  There has been a noticeable change in ETF investment attitudes perhaps, but the bulk of investors have remained loyal, if I can use that phrase.  I believe too much really has been read in the outflow - there have been outflows before - there may be some or a small amount of short term investors that have looked to perhaps go for better returns elsewhere.  But on the whole, ETFs still are fairly substantial - the 15 that we measure are almost up to 66 million ounces - that is still a lot.
GEOFF CANDY:  Going forward, what is the VM Group's view then of what we're likely to see of gold prices over the course of 2011?
CARL FIRMAN:  At the beginning of the year - 2011 - most commentators, forecasters, including us, forecast quite substantially higher gold prices - some highs were actually up to around $1,600 - that looked to being dashed in January but the geo-political fears in the North Africa and the Middle East could very well see the gold price challenge those particular new record highs.  So this year, on the inflationary concerns that are already in place, there are quantitative easing initiatives in the US and elsewhere, gold is well supported on those - now it's getting support from actual events in the Middle East and I can see gold doing very well.  Our average is for $1,457 this year and I can see further price strength over the next quarter and a half.
GEOFF CANDY:  Coming back to your initial comments around the fact that gold looked clearly to have lost some momentum in January, what were the reasons behind that, and if the Middle East region stabilises to any great extent, what is then likely to happen?
CARL FIRMAN:  January - confidence had returned, sentiment turned, the US economy was expected to grow and grow quite robustly this year, following the injection of basic cash through the Federal Reserve - QE2 programme - that with continued demand from emerging markets gave rise to more confidence in stocks, equities, industrial metals and took away gold's allure as a safe haven that was no longer needed - growth was assured and that was soon dashed at the end of January with Egypt and Libya and so forth.  If that does ease - the Middle East does ease and there is more clarity in the Middle East situation, I can't see it myself that this could be drawn over a long period, but if confidence does return, then I could see the gold price easing.

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