By Allen Sykora of Kitco News
Monday March 18, 2013 10:45 AM
(Kitco News) - HSBC looks for a recovery in gold, saying that rising global liquidity, “inflation tolerance” by authorities, currency wars and an eventual end to exchange-traded-fund liquidation are likely to support the metal.
The bank trimmed its average price forecasts for 2013, but said this was to take into account the weakness for the year to date. Gold fell from $1,696 an ounce earlier this year to around $1,595 as analysts were writing their report, released Monday.
“We view this shift as only a short-term phenomenon, however, and we remain bullish on gold,” HSBC said.
The bank trimmed its 2013 gold forecast to $1,700 an ounce from $1,760 previously. It now lists a 2014 outlook of $1,720, compared to $1,775 previously.
Some of the decline so far this year is the result of some investors looking for an earlier end to the Federal Reserve’s bond buying program known as quantitative easing. However, HSBC said, U.S. monetary policy remains “highly accommodative,” and Fed Chairman Ben Bernanke is likely to continue favoring aggressive accommodation for some time.
“Accommodative monetary policy has been a mainstay of the gold rally, and until that policy changes, we believe the bull market will remain intact,” HSBC said.
HSBC precious-metals analyst note that earlier this month, the bank’s global head of asset allocation raised the weighting of gold in his portfolio to 8% from 7%, commenting that dovish rhetoric by central banks raises at least some inflationary risks.
“This could have important positive ramifications for gold, we believe, as prices tend to rise quickly when inflation expectations increase,” HSBC said.
HSBC’s currency research team has suggested countries have entered into a currency war and that the “conflict” could escalate this year. “Historically, periods of competitive currency depreciation as outlined by the forex research team are good for gold,” HSBC said.
Support also may come from “economic nationalism” as countries look for solutions to economic stagnation that are actually international problems, as well as geopolitical tensions in Asia and the Middle East, HSBC said.
Hedge funds and other investors have reduced holdings in gold exchange-traded funds during the early part of 2013, while speculators have slashed their net-long positioning on the Comex division of the New York Mercantile Exchange, with some of this the result of a rising number of total short positions.
“That said, we believe the bulk of ETF investors have a proven buy-and-hold mentality and are content to hold onto their positions, despite recent price weakness,” HSBC said. “Furthermore, the growth in gross shorts on the Comex leaves that market open to a short-covering rally, should investor sentiment improve.
Outflows from gold ETFs so far this year are 141 metric tons, HSBC reported. However, the bank said it expects this to stabilize. HSBC projects gold ETF demand to turn positive later this year and post a net rise of 50 tons for 2013.
Analysts also expect central-bank buying of gold to continue, forecasting another 450 metric tons will be purchased by reserve managers this year. Further, the drop in prices so far in 2013 may stimulate jewelry demand and curb scrap supply, as well as spurring retail coin and small-bar demand, HSBC said.
The bank looks for a range of around $1,525 to $1,825 an ounce for 2013. More pressure could occur in the near term.
“Later in 2013, we expect monetary easing, escalating currency wars, and geopolitical tensions to support gold prices up to USD1,800/oz,” HSBC said. “Increased inflationary expectations should buoy gold. A price-led recovery in jewelry, coin, and small bar demand should keep gold from
challenging the USD1,500/oz level. Also, central bank demand should help put a floor on prices.
“To the downside, the market is at risk from further gold ETF or Comex liquidations, which could take prices below USD1,500/oz, we estimate. Although we believe a break below USD1,500/oz is unlikely, if it
were to occur, lower prices could stimulate increased physical demand and raise the possibility of a reduction in mine output, in our view. This should
help set a firm floor for prices at USD1,450/oz.”
For 2013, HSBC forecast that global mine production will increase slightly to 2,900 metric tons from 2,848 in 2012. Old gold scrap supply is expected to dip to 1,550 tons from 1,626.
The bank looks for global jewelry demand to rise to 1,960 tons this year from 1,908 last year. Total investment demand – the sum of bars, coins, medals and exchange-traded funds -- is projected at 1,515 tons, compared to 1,535 for 2012.
By Allen Sykora of Kitco News; firstname.lastname@example.org