Gold Prices Expected To Continue To Rise Under Loose Monetary Policy, Public Debt Worries

Wednesday August 10, 2011 12:59PM

(Updates story with additional commentary)

(Kitco News) - Gold prices have set a series of record nominal price highs in recent days and market watchers expect the yellow metal to continue to press higher. The continued economic uncertainties – whether it is public debt in the Western countries or inflation in emerging markets – combined with the Federal Reserve’s declaration to keep U.S. interest rates floating between zero and 25 basis points until mid-2013 make gold an attractive asset.

This week several investment banks raised their forecast for gold prices. On Monday HSBC lifted its average price for 2011 to $1,590 an ounce and for 2012 to $1,625. Goldman Sachs raised their three, six and 12-month average price forecasts to $1,645, $1,730 and $1,860, respectively. On Tuesday, Commerzbank increased their third quarter average price outlook to $1,700 and the fourth quarter 2011 and first quarter 2012 to $1,800.

Kitco News interviewed several veteran market watchers for their outlook for gold prices this year and into the first quarter of 2012.

David Wilson, director, metals research, Societe Generale

“Everything points to more support for gold. We’re at $1,769 (an ounce) right now. With low interest rates (in the U.S.) that’s supportive because there are inflation concerns that can happen further out.” “Political prevarication” in both the European Union and the U.S. in dealing with their respective debt issues is another reason to give gold a boost. Prior to Standard &Poor’s downgrade of the U.S. debt rating he forecast gold rising to $1,800 by year’s end, but “I have to work on a new forecast for further upside.”

Afshin Nabavi, head of trading, MKS Finance

“As long as there are no solutions to the financial problems of the U.S. and the European Union, the market will continue to go higher…Any kind of short-term correction would be a good dip to buy into.” How high can gold go yet this year?  “As they say, the sky is the limit,” he says with a laugh. “We saw $1,782 yesterday. $1,800 is probably the next psychological level. If that goes, we could head for the $2,000 area. It all depends on if they find any kind of solutions. “Technically, we haven’t had a correction since $1,580. We will see it (a correction) eventually once things calm down. But until then, we could continue to go higher and higher.”

George Gero, vice president and precious-metals strategist, RBC Capital Markets Global Futures

“I think probably some profit-taking (will occur) at some point, but nothing major until we see some clearance in the other markets.” He notes safe-haven demand continued as equities opened weaker. “The need for a haven hasn’t extended too much to other assets because none of them are acting as well as gold. Money managers look for performing assets.” It’s hard saying where gold will go, he says. “This actually could turn on a dime, just the way the stock market turned on a dime yesterday a few times. Gold yesterday at one point dropped $50 in a very short period of time…Also, there are more worried people in gold who tend to make headline(-based) decisions instead of investment decisions.”

Mark Leibovit, editor, VRTrader Newsletter

“Though there is theoretical risk back to $1,683 or so, I am still targeting gold to $2,000+…. The big question is whether short-term negative seasonality will even kick in here which calls for a pullback in August and sometimes September before the market launches again to the upside. It may all come down to the fact that so many investors had their fingers on the buy trigger anticipating a summer pullback, someone flinched and jumped the gun an off we went into the stratosphere.”

Mike Daly, gold and silver specialist, PFGBEST

Gold is underpinned by U.S. concerns such as a still-soft economy and S&P’s downgrade of U.S. long-term debt. “Until we get our house in order here and can stop worrying about what is going on in Europe, people will want to stay in the gold market.” He looks for further support from the Indian “wedding season” that starts next month. “It  doesn’t  really matter what the price of gold is. It’s very hard to tell a bride she can’t have this on her wedding day. The quality of gold might be less. Instead of 24-karat, maybe it will be 18-karat or 14-karat or maybe it will be a combination of gold and silver.” He says $2,000 gold is possible by year end. “If things stay the same, $2,000 is not out of the realm at all. I keep trying to think of what will bring the market down. One of the things I thought would bring the market down would be if the FOMC started to raise rates. Well, they’ve basically said they’re not going to do that for two years…I think people have wised up since 2008 and become savvier and said that during times of economic chaos or uncertainty or whatever word you choose, gold and silver retain their value better.”

Michael Lewis, managing director, global head of commodities research, Deutsche Bank

“For the time being, we are leaving our $2,000 price target for 2012 unchanged. However, as we outlined a few years ago the likelihood of a bubble developing in the gold market is a high probability event given the appetite to buy gold when the US dollar is rising and falling, and to buy gold to hedge against inflation and deflation. On the indicators we measured and published in June last year, the gold price would need to hit USD2,960/oz to bring the gold price relative to the S&P500 back to the levels of the 1930s. For the time being this is not the economic scenario that we are forecasting, but, events in recent days have certainly moved us closer to this outcome. According to the gold options market, the probability of the gold price trading at the $1,800 level for the foreseeable future is a high probability.  However, a move lower to $1,600 is considered a more likely scenario than a rise to $2,000. A view we do not share.”

Sterling Smith, commodity trading adviser and market analyst with Country Hedging

“Gold is getting overheated from a technical point of view. That said, the current environment is rather difficult and unique. Demand remains retail and institutional investors remains well-supported. Given the condition of the current global financial mess, despite its overheated nature I remain bullish on gold. In the near-term (Comex December gold) could go to $1,829 and beyond that $1,863. If something extreme happens, given the U.S. downgrade, gold is the safe haven given the ridiculous appreciation of the Swiss Franc, we could see $2,000 gold by Labor Day, but I doubt it. By the end of the year we could see $2,200-$2,250 which would about equal the inflation-adjust high set during the Carter administration.” Is gold going parabolic like silver did? “It’s acting a little like it, but gold’s characteristics are different. You have a little better holder in gold, less Michelle Bachman like in their behavior. If we put together a gold rally of up $400 two days in a row, then there would be serious parabolic concerns.”

Kevin Grady, gold trader on Comex floor, MF Global

“I do think the psychological number of $2,000 is attainable. The exchange may come out and raise margins and that will drop the price down, or something like that. But the bottom line is there really are no other reasons for gold to sell off right now. The one knock on gold is that it’s a non-interest-bearing asset. Why keep my money there? But if you look at what happened with bonds…you’re not getting any money there." U.S. 10-year Treasury note yields have fallen to the low 2% area. So there goes that argument (of gold not providing interest payments). So that’s why people are starting to drive into gold. I still say there is central-bank buying under the market and that’s why you’re not getting $100 to $200 corrections. You could get a push down of maybe $80. But I think down around those levels, it’s a very strong buy.”

Frank Lesh, broker and futures analyst with FuturePath Trading
“It depends on the markets at the moment and that will determine how long the fear trade goes on.  There’s no reason to be short on gold at the moment. Even if there is a correction in gold, I expect people to buy on dips….The Fed keeping interest rates low until 2013 could also play a part in the rise. Higher interest rates could bring gold back down. At the moment, fear is driving gold.”

Spencer Patton, chief investment officer, Steel Vine Investments

“In the short term, my thesis is that stocks will find some stability (after the recent sell-off). I think gold is ready for a pullback shortly, visiting the high $1,600s again over the next couple of weeks…However, I think that these pullbacks are buying opportunities in gold. I really don’t think that we have a massive decline ahead of us. I think the long-term trend is higher…You could see it moving toward $1,900 by year-end.”

Alexander Letourneau contributed to this story.

By Allen Sykora and Debbie Carlson of Kitco News; asykora@kitco.com and dcarlson@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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