Gold's upside potential $100 to $200/oz - HSBC
By: Stewart Bailey
>>Williamson says the drop in the dollar of 9.8 percent this year has triggered a spate of investor buying and has added an estimated $18/oz to the gold price. He says rising bond yields have added another $11/oz to the price, while weak equity markets – the S&P 500 is down 37 percent since the technology boom in 2000 and the Nadaq is down 72 percent over the same period – have given gold a $25/oz boost.<<
Posted: 2002/07/17 Wed 19:28 ZE2 | © Miningweb 1997-2002
JOHANNESBURG – Global investment bank HSBC has published a report on the gold market in which commodities analyst Alan Williamson predicts the bullion price will peak at $350/oz in the final quarter of this year. The bank's London-based commodity research team also says the gold could "potentially…be looking at the most bullish scenario in twenty years", with a potential upside of between $100/oz and $200/oz.
The bullish outlook will be published in HSBC's Senior Gold Book which is to be released later this week and is based on the bank's own currency, general equity and macroeconomic forecasts. It comes as the bank increased its average gold price projection for the year to $313/oz, up from its previous forecast of $305/oz. It expects gold to average $325/oz next year. Williamson says gold's peak will coincide with a "final trough in global equity prices" at the end of the year.
"Into next year prices are likely to be volatile as the positive impact of a weakening dollar and ongoing improvements in supply and demand are at odds with the negative effects of a stock market recovery. Over the longer term, however, the risk to prices remains firmly on the upside," said Williamson.
Interestingly though, HSBC says this upside potential for bullion could be as much as $100/oz to $200/oz if gold benefits from the confluence of a bearish equity market, rising investment demand for bullion and an assertion of bullish supply-demand fundamentals.
"Potentially the gold market could be looking at the most bullish scenario in twenty years. If a more bearish macroeconomic scenario than HSBC expects does eventuate and new supplies deteriorate and investment demand continues to increase, there remains considerable upside to gold prices. With all these planets in alignment the pull on gold would be irresistible. Gold prices USD100-200/oz higher than currently could materialise," said HSBC.
Williamson says the drop in the dollar of 9.8 percent this year has triggered a spate of investor buying and has added an estimated $18/oz to the gold price. He says rising bond yields have added another $11/oz to the price, while weak equity markets – the S&P 500 is down 37 percent since the technology boom in 2000 and the Nadaq is down 72 percent over the same period – have given gold a $25/oz boost.
The fall in equities may have been the biggest single contributor to gold's improved fortunes over the past year, but HSBC says a recovery in general equity markets starting next year, is likely to put downward pressure on the gold price.
But Williamson concedes that the view is premised on the fact that investors will play by the same rules which have governed the gold market in the past, with their behaviour reinforcing the negative correlation between general equity performance and the gold price. In this respect, the net long position held by funds and speculators on the Comex presents a threat as some bears believe a sell-off of the net large non-commerical positions could force gold lower. Williamson says the longs are at around four million ounces, up from a net short position of six million ounces last April. "This 10 million ounce-plus buying interest has had a significant impact on bullion prices," he says.
That may be so, but risks here are glaringly obvious. The higher dollar gold price will no doubt depress elastic consumer demand for the metal, limiting the attraction to new buyers. Similarly, the longs could easily become disillusioned with a stagnant investment threatened by a large overhang and begin a shake-out which could also drive the gold price mercilessly lower.
"However, this presupposes that the existing 'rules' under which the gold market has operated remain in force. The bulls would argue that this is no longer the case and that the changes in mine output and producer hedging plans, in turn a direct response to the recent period of low prices, will see the gold market enjoy a sustained change in investor attitudes in the metal," said Williamson.
Another bull convert
Another recent convert to the bulls' ranks is Martin Jankelowitz, head of market and economic research at South African-based fund manager Investment Solutions. Jankelowitz is less sanguine about the prospects for equity markets going into next year.
"I think the risk (for global equities) continues to be very much on the downside," said Jankelowitz. His view is based on the overdone performance of stocks over the past 18 years, during which time he said US equities consistently delivered annual returns in excess of 15 percent.
"Its going to take a long time to work those excesses out of the system," he said. In this context and against a bearish backdrop for global currencies as central banks pump liquidity into the system to maintain competitive levels against a weakening dollar, Jankelowitz says gold and commodities are the investment class of choice.
"I think gold is a very good safe haven investment to have in this environment," he said.
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