What Next For Gold?

July 16, 2013 at 08:17

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The recent volatility of the gold price has demonstrated how little substance, or ‘technical support’, underpins the price of the precious metal.

From a peak of $1,900 per ounce in August 2011, gold fell to $1,250 at the beginning of July 2013.

Investment funds investing in gold have been hit hard. Here two of the top managers in the sector give there views.

‘I have never found it as difficult as in the last twelve months,’ said Georges Lequime, manager of the Earth Gold fund , which dropped 43% from the end of March to date, compared with a 40% decline in the FTSE Gold Mines TR index.

‘The only encouragement we can take at the moment is that the long positions have fallen so dramatically on the COMEX that something has to turn,’ he added in reference to the primary market for trading gold futures contracts.

The reasons for gold’s recent fall are numerous. A commodity that is not consumed in the same way as other physical goods, such as oil or soya beans, demand for gold surges at times of extreme scenarios; war, financial meltdown and severe currency devaluations.

At least two of the above factors have plagued investors’ minds since gold started its bull run in 2007. Speculation that the US Federal Reserve will slow its monthly buying of government bonds is considered the main reason for the most recent nose dive in the price of gold.

Minutes of the Fed’s meeting released on Thursday showed, however, that many officials wanted to see more signs of improving employment before they would back a cut in bond buying.

‘Monetary policy is just in disarray,’ said John Hathaway, manager of the Tocqueville Gold fund , which fell 33.58% from the end of March to date.

‘The markets were taking shorts at $1,500 on the talk of all the tightening of monetary policy but there is no chance of this now,’ adding he predicts that gold could recover to $1,500 an ounce over the next three months.

Gold mining stocks depend on a stable gold price in order to make mining profitable, however much of the bad performance is due to specific reasons such as increased labour costs.

‘All the risks gold miners face like geopolitical risks and labour costs, are priced in,’ said Hathaway.

‘We will buy anything if it’s cheap enough and a lot looks cheap at the moment.’

Lequime, who has no exposure to bullion in his fund, sees gold price needing to trade at above $1,500 for gold companies to be profitable (see chart below, source: Earth Resources Investment Group).

‘Much depends on the gold price. At present, equities to bullion are trading at five-year lows. With a rise in gold price, I could see some of my holdings see valuations increase three or four-fold.’