Gold Ran Too Far, Too Fast
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- It was a rough day on the gold market today, with the yellow metal losing $27.30 to end at $787.40 per ounce. According to Philip Klapwijk of GFMS, it looks like the much-anticipated correction is here.
RESOURCE INVESTOR: Hi, this is Jane Louis with Resource Investor. The gold price has taken a hit this week, dropping $20 today alone and falling below the $800 mark. We’re here today with Philip Klapwijk, executive chairman of precious metals consultancy GFMS Ltd., to talk about recent trends in the gold market and where the precious metal is heading in the fourth quarter.
Hi, Philip. Welcome to Resource Investor.
PHILIP KLAPWIJK: Hello.
RESOURCE INVESTOR: So gold is taking a beating today, losing more than $20. In your opinion, has the market become too overheated?
PHILIP KLAPWIJK: Yes, I think things have really run a bit too far, too fast, and I’m not surprised that we’ve had this sell-off. I think this is something that’s been coming for a few days now. We already had a bit of a dip not so long ago, and this looks like the real McCoy.
RESOURCE INVESTOR: Do you think gold will rebound and surpass the $850 mark in the fourth quarter?
PHILIP KLAPWIJK: I think that there’s a good chance it could rebound in the fourth quarter. I believe that we will continue to see a stream of bad news for the U.S. dollar, news that will also lead to perhaps a higher oil price environment again, and cuts in U.S. interest rates I think will be on the cards before the end of the year quite potentially. So I think we’re going to see more of the same as it where in terms of the forces that push gold higher or that provided the backdrop for the investment demand that pushed gold higher in recent weeks. That’s going to come back again and I think drive gold back up towards $850 and perhaps a higher level. But in the interim, we could see a couple of weeks of weakness now.
RESOURCE INVESTOR: Do you think there are other drivers that could crop up to support the price, maybe geopolitical concerns?
PHILIP KLAPWIJK: Yes, I think that could certainly become a life force again in favour of gold. We’ve seen the events that have already happened through the intermediary if you like of the oil price, and clearly $100 oil was to some extent reflecting geopolitical concerns regarding Iran, and I will expect that to probably start to hot up again. It’s calmed down a little bit recently, and we’ve seen oil prices of course come off in recent days too towards $90, rather than closer to $100 a barrel, and I think we will therefore see geopolitical issues also come to the floor, if not in the next couple of weeks, quite potentially before the end of the year.
RESOURCE INVESTOR: Well according to the World Gold Council’s “Gold Demand Trends Report” that was just released, gold demand was at a record high in the third quarter, boosted by a record inflow into ETFs. What does this tell us about the attitude of the market?
PHILIP KLAPWIJK: Well I think what that tells us is that in the third quarter we had a combination of, firstly in July and August, of really quite healthy demand for jewellery. At that time, investment demand for the ETFs and similar products was also ticking along reasonably nicely, and then we had a fantastic surge in ETF-related demand in September as the investors really got the ball rolling.
RESOURCE INVESTOR: As we continue into the fourth quarter, do you think ETFs will remain a top supporter of gold demand?
PHILIP KLAPWIJK: Well, recently we’ve actually seen some reductions in ETF holdings and I wouldn’t be surprised if with the sort of sell-off the scales - the sell-off we’ve had today and that we may see in the next couple of weeks or so - that ETF related demand could turn negative for a short period. It’s quite possible that we see those holdings come off a bit. But I think the overall trend will continue over the medium term to be upwards and for increases in ETF holdings, and for that to be another positive support for the price.
RESOURCE INVESTOR: The report also said India’s gold demand actually dropped in the third quarter, despite the approaching festival season. Do you think the recent dips in the gold price may boost the country’s demand back up in the fourth quarter?
PHILIP KLAPWIJK: Well, I think if you look what happened in India, the quarter-on-quarter demand was down in the third quarter, but that was coming off of an absolutely fantastic second quarter. So that’s a bit of an unfair comparison perhaps. If you look on it on a year-on-year basis, I believe India was up around about 6% year-on-year in the third quarter. Clearly what happened in India though was that by - quite apart from the fact that consumers had to digest a huge amount of gold that was demanded in the second quarter - was that by the month of September, higher prices were having a negative impact on Indian demand. And that will continue to be the case in the fourth quarter to date; a combination of high prices and high gold price volatility is not good for these price sensitive markets like India.
RESOURCE INVESTOR: But China’s demand was also up in the third quarter. Do you think that’s supporting the gold price too?
PHILIP KLAPWIJK: Yes, I think China, and in fact other countries, and India would be included in this, have been pretty good support for the market particularly at lower levels during the course of this year. And in the third quarter, the very strong jewellery demand that we saw, if we can call it greater China, but particularly the PRC, was I think instrumental in prices in mid-August not falling below the $640s level. We had very good fundament support if you like from the jewellery business at that time, and a lot of that support was coming out of China.
RESOURCE INVESTOR: As we head into the end of the year here, what’s your call for gold’s high? Where do you think it’s going to end up by the end of the year?
PHILIP KLAPWIJK: I think it’s a bit difficult to sort of put us into a slightly artificial, shall we say, calendar constraint here in terms of saying, will prices necessarily go back up to $850 or perhaps exceed that level before the end of December. I think that’s a tough call because I do believe that we will have a period of weakness now. But I would say if we were to extend the analysis into early 2008, I would be very surprised if gold does not within the next three months have an attack on that $850 level again, and I think surpass it.
RESOURCE INVESTOR: All right, great. Thank you so much for talking with us, Philip. We really appreciate it.
PHILIP KLAPWIJK: Thank you. |
