Stimulus to Avert Gold Bear Market?

April 7, 2013 at 18:41


The spot gold price hit an intraday high of $1,921.41 in September 2011, but it has been on a downward trajectory since then. It now sits at $1,581.25 (£1,038.76) an ounce. A bear market is loosely defined as a 20pc fall from its peak, so the price of the precious metal needs to fall below $1,537.13 to officially unleash the bear. That’s just 3pc below its current level.

Even GFMS, the precious metals consultancy now owned by Thomson Reuters, has raised the prospect of a bear market, but not until 2014. Until then, it reckons the bull will still be in charge.

“Gold is forecast to overcome recent lethargy as renewed investment drives price back over $1,800 before year end,” it argued. However, Neil Meader, head of precious metals research at the body, accepted a bear market was possible.

“There’s arguably clearer light at the end of the tunnel in that we can perceive a return to something more like normality for the macro-economic backdrop, and that could easily entail the start of a secular bear market, perhaps in late 2013 or more probably in 2014,” Mr Meader said.

This upbeat tone was questioned by some. “The outlook certainly raised some eyebrows as a bullish call estimating a 2013 average of $1,730 an ounce with highs in the $1,800s is a far cry from the market consensus at this time,” Kieron Hodgson, an analyst at Charles Stanley, said. “In a continuing trend, gold-backed [exchange-traded products] holdings are now down over 7pc from their highs in December… The market consensus is to call gold lower. However geopolitical uncertainties, especially in North Korea, should never really be ignored.”

Indeed, “geopolitical uncertainties” can take many forms and two events at the end of the week mean that money printing machines the world over are being cranked up as high as governments dare.

On Thursday, the Bank of Japan (BOJ) unveiled plans to pump massive amounts of money into the financial system to boost lending and kick-start growth. The BOJ wants to double the money supply and boost inflation to 2pc over the course of the next two years. However, this failed to make much impact on the gold price, which finished 0.2pc lower.

However, things were different on Friday. Gold jumped by $26.45, or 1.7pc, after downbeat jobs data across the Atlantic. This was its biggest one-day gain since November last year, but some of the rise was down to short covering after the data showed that the US employers hired new workers at the slowest rate in nine months.

This eased fears that the Federal Reserve would change its current quantitative easing strategy of buying $85bn (£55.8bn) worth of mortgage-backed securities a month.

However, although the global economy is far from out of the woods, there are hopes of an improvement. When the global economy recovers – and it will – this will be bad for mass investment in gold. The unwinding of positions from exchange-traded products shows that some investors want to be the first out of the door.

“The US economy is the most important when it comes to investment demand for gold,” said Ben Traynor, chief economist at BullionVault, which manages and stores gold for private investors.

“If the US economy improves and the Federal Reserve starts to unwind its ultra-loose monetary policies, one would expect this to be bearish for the gold price. In fact, if enough investors take this to be the most likely scenario, this in itself will weigh on gold demand.”

So, money printing machines look likely to support the gold price in the short term, but based on current trends, the bear market for gold doesn’t look like it’s too far away.