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A look at where gold goes from here with a focus on China's continuing role and a view on silver
GEOFF CANDY: Hello and welcome to this week’s edition of Mineweb.com’s Gold Weekly podcast, joining me on the line is UBS precious metals strategist Dr. Edel Tully. Edel precious metals have had a pretty rocky time of things in the last week or so but before that they have had a rather good time. Silver down almost 30% last week, gold down around 4.5%, a lot of people saying that this pull back was inevitable; is this the pull back that everyone was waiting for and should it, or could it have gone further?
EDEL TULLY: I think silver fell a lot, and some people perhaps expected it to fall some more but it did find good support down there in the mid 30s. I think comparison, gold performed pretty well given the huge silver wash out. And, if you think of the factors which caused the silver washout: the ratio unwind, the gold:silver ratio, the spate of CME margin hikes, the ETF and the index selling and the Chinese and some of the other marginal buyers who had been part of the reason why silver got close to $50 all moving on to the sell side, so silver fell really hard. But, gold, by comparison, we were quite impressed by gold’s performance. It was certainly helped by the fact that silver was so volatile that people looked a lot more favourably on gold as, perhaps, the precious metal and also physical demand also helped gold on a lot of the pullbacks. So, gold obviously pulled back into the mid 60s, found some decent buying there and today we are holding relatively well above the $1,510 mark and certainly gold feels more comfortable up in these areas right now today, where as for silver, I would say the roller coaster ride is not over at all yet.
GEOFF CANDY: How big a factor was the realisation that Mexico had bought 93 tonnes of gold over the last few months, how much of that came in as an underpin for the gold price.
EDEL TULLY: It was certainly there as an underpinning but I wouldn’t say it was a hugely strong factor. I think that factor will become more apparent later in this year in the sense that the market has become used to central banks now being on the buy-side of the market. And, certainly, the news that Mexico had bought gold was certainly a surprise because I think most of the market was of the view that central banks were indeed quiet in the first quarter. But, I don’t think the actual announcement of the central bank activity did a huge amount on the day but, I think over the course of the year it is just another explanatory factor in why gold should move higher from here.
GEOFF CANDY: Where do you see gold going over the course of this year?
EDEL TULLY: Our average gold price for the course of this year is $1,500, so it is just a tiny bit below where gold is trading right now, so I think a gold price above $1,600 this year is very, very possible.
GEOFF CANDY: If we look at the factors that are coming into play, clearly central bank buying one of them, demand from China another, and there was a report out of UBS talking about the demand for gold in China, how important is that as a factor?
EDEL TULLY: Firstly on the central bank side, I think it is an important underpinning factor as you said earlier but, from the news last week of central bank buying , I think the biggest take-away we can grab from that is that another region of the world, another central bank region is buying gold. So, it is not just concentrated in Asia, that it is now in the Americas. So, the potential for another central bank in South America perhaps could be quite high going forward. China, of course, remains hugely important for the gold market. Those of us who follow China closely know how important this market has become. And, one of the big reasons why the Chinese have been buying gold is acutely linked to inflation. Certainly, China is much quieter, if you look at the flows that go through, the volumes that go through on the Shanghai gold exchange; China is quieter now than it was in January. But, that is not surprising because China was, in a sense, acutely busy, unnaturally busy in the end of January, early February. So, you will have quiet periods in China but, certainly on the whole, expect China to continue with its steep appetite for gold going forward. I don’t see anything in China changing in the near term.
GEOFF CANDY: Edel if I understand it correctly, the inflation factor in China almost comes into play as two opposing forces in that you have inflation making prices more expensive on the one hand and so people have less money to spend on gold but at the other end of the spectrum you have people wanting to buy gold as a store of wealth against inflation. Is there any way to gauge which side of that coin is likely to play out more aggressively?
EDEL TULLY: I think given the appreciation of the gold price, part of that is linked to inflation so it is one of the reasons why the Chinese remain happy to buy gold even at these steep prices with the expectation that the gold price is going to climb higher because, one reason being the inflation trade. And you can certainly see that very keenly through retail sales and not just jewellery sales and retail sales from many different products, but from the young and the old of the Chinese population. So, it is very much across the board and I would say that whenever I go to China, the actual view on inflation appears to be much higher on the ground than what the official statistics would reveal. So, I think the Chinese population will remain friendly toward gold so long, really as inflation is a problem.
GEOFF CANDY: In terms of India, can similar inferences be drawn there?
EDEL TULLY: Somewhat, but not quite as strong. Inflation in India is a factor but not quite as obvious as it is in China. The wealth effect equally is very apparent in India. When I look at our physical sales to India over the last week and a half, two weeks, they have been particularly strong. One reason for this was the festival that took place last Friday, an auspicious time to buy gold, naturally you expect your physical flows to be higher but, they were significantly higher and quite surprisingly given that the gold price was trading well above $1,500 an ounce. Again, yesterday our physical sales to India hit their second highest level so far this year. So, India to me is quite surprising right now, considering where the gold price is and, considering also, now you are in the wind down to the physical season, the end of the wedding season at the end of this month. So, typically India goes quiet over our summer months but, to me, I don’t think that India is behaving with the same seasonality as we have come to expect and I think that is quite apparent in that they are still buying despite gold trading above $1,500 an ounce. So, I think that over the summer months, yes you are not going to have the wedding type buying but there certainly seems to be an appetite for gold in India that is not going to disappear over the summer months.
GEOFF CANDY: If we look at the European factors. You have concerns continuing to raise their heads around Greece, how much of a factor is that for the gold price in Europe?
EDEL TULLY: It cannot be discounted as certainly having an impact and, potentially more of an impact on the gold price. It was very acute when Greece erupted the first time round in Q2 last year. I am not necessarily sure we can go back to the same level of impact that we saw back then, but I think the market, and I don’t mean just the precious metals market, but the wider financial markets, are certainly paying more attention to the problems in Europe right now than perhaps they have done pretty much all this year. So, it will have an impact on gold going forward but it is important that gold can separate itself from its negative correlation with the US$ because if these European problems persist not just in Greece but, that this could lead to talks about Ireland renegotiating its loan, that it is important that, if the euro weakens and the dollar gains, that gold can separate itself from its traditional negative correlation with the dollar as it did in Q2 last year. And, that is going to be very important that gold is able to do that.
GEOFF CANDY: Do you think that is likely?
EDEL TULLY: I think so, so far it is looking like that; gold is performing pretty ok against this backdrop of European anguish. Just one thing also to say on this is that we have seen a direct correlation between our coin sales and the emergence of further European woes. For example, at the end of last week, when the headlines about Greece and meetings over the weekend were hitting the news wires, we were certainly seeing a reaction from our clients and they were looking to buy coins. And, coin sales typically reflect the fear and paranoia that is in the market. So, we did see some of that emerge last week. But, it is not at elevated levels at all but, it is certainly a variable and an indicator to watch going forward, if the European situation becomes more of a front and centre issue.
GEOFF CANDY: On the US front, we have continuing concerns around the dollar, around debt levels, but we also have the end of QE2 in June, is that likely to have an impact.
EDEL TULLY: Yeah, the end of QE2, even just from a psychological point of view could lead to gold taking a step back, that wouldn’t surprise me whatsoever. But, the end of QE2 doesn’t necessarily mean we are moving to a tighter monetary policy, US monetary policy is going to remain loose for some time, hence the backdrop for a rising gold price, or at least a stable gold price remains the case. Add into the mix then, a very uncertain US fiscal backdrop and it certainly is a number of interesting variables that will help to make sure that gold continues to be supported by investors.
GEOFF CANDY: Finally, you mentioned the volatility in silver is likely to continue, are you liking silver at these levels, now that it has come down or is gold still your preferred option in the precious metals space.
EDEL TULLY: Gold, from a purely precious metals and a safe haven angle, is our preferred method. If you want to make some short term gains, silver perhaps offers more opportunities but, also, far bigger risks. Obviously silver has come back quite impressively, it is up over $5 from the lows of last week so you could have made some big gains from those lows but, I would prefer to see silver try to stabilise somewhat, that it consolidates for a little while because I don’t believe that the rollercoaster is at all over for silver. I think $50 is still quite possible but, that route back up to $50 is going to be alive with very volatile price action.
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