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Analysts More Bullish on Gold as Fiscal Cliff Looms

Release Date: 
Saturday, October 13, 2012

Gold followed the euro this week, tracking the currency lower on concerns over the continuing debt crises in Spain and Greece. Gold was $27.00 lower for the week, settling at $1755.30 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $1.03 lower, closing at $33.58 per ounce.

A meeting of eurozone finance ministers on Monday dampened hopes of a Spanish bailout with the ministers insisting Spain obtain funding via capital markets. Greece's international lenders may extend the time in which Greece must meet its deficit reduction targets as economic tension over the country's fiscal issues remains high.

China's central bank, the world's second largest gold buyer, this week made its second largest gross cash injection into its domestic money markets on record. The move follows monetary stimulus from the U.S., U.K. Europe and Japan.

The International Monetary Fund cut its 2012 global growth forecast to 3.3 percent and warned U.S. and European policymakers that failure to solve their respective economic problems would hurt growth.

The latest Reuters poll shows that precious metals analysts have become more bullish for the prospects for gold and silver than they were 3 months ago. Gold has risen by approximately 13 percent in 2012 to date, making it one of the strongest-performing commodities this year. Gold is roughly $215 higher in 2012, with approximately $165 in gains in the last two months following the Fed's announcement of a third round of quantitative easing.

Swiss banks UBS increased its average price targets for precious metals in 2013. UBS raised its target to $1,900 per ounce. "The open-ended nature of QE ... promises longevity for a higher gold trade and the quantitative easing and strength in gold also supports silver," the bank noted.

Credit Suisse also raised its gold and silver forecasts for 2013. The average gold price in 2013 may rise to $1,840 per ounce, the bank said, a 7% increase from its prior forecast. Analysts raised the bank's average 2013 price target for silver by 13% to $33.10 per ounce.

"The Fed is not finished: QE 3.5 is likely, possibly as soon as December in the form of on-going purchases of treasuries after Operation Twist expires," Credit Suisse analysts said. "The Federal Reserve appears prepared to accept the political risks of further balance sheet expansion [and] on that basis, it seems probable that real yields can fall further into negative territory, which should be positive for gold," the analysts said, noting that "a move back in to the $1,830 per ounce area would simply place [gold] back on the long term trend."  Credit Suisse also cited physical demand in China and India as being bullish for gold.

According to Credit Suisse, the gold market will be highly attuned to any hint that one or more of the major ratings agencies might cut the U.S. credit rating if Congress fails to sufficiently address the fiscal cliff at the end of 2012. While Credit Suisse economists believe deals will be done to avoid the most severe effects of expiring tax rebates and automatic spending cuts, "those deals may well be temporary and deep structural issues will remain unresolved," the bank said.

Other analysts recently commented on a fiscal cliff crisis expected at the end of the year. Nataxis analyst Nic Brown believes investors will closely monitor the U.S. economy as the fiscal cliff of mandatory spending cuts and tax increases approaches. "What will probably be just as important as QE3 is what happens with this fiscal cliff," he said. "In 2011, the peak in gold prices was related to the inability of Congress to raise the debt ceiling. It wasn't just QE that was pushing it, but the perceived deterioration in the U.S. fiscal position." Mr. Brown added, "if the market gets it into its head that the U.S. has a problem just like Europe, gold prices could push significantly higher. That will ultimately be the determining factor."

Triggering the fiscal cliff "will mean more stimulus, and that might be another leg up for gold," said Pau Morilla-Giner, chief investment officer at London & Capital. "In six months time, we might see gold flirting with $1,900 or $1,950."

Strategists at Deutsche Bank , said "fears toward the fiscal outlook will intensify in the fourth quarter, along with the possibility of a U.S. credit downgrade event." They noted, "this will prove to be most beneficial to the precious metals complex and specifically gold."

Coutts, the private banking arm of the Royal Bank of Scotland, believes investors should double the amount of gold they hold as the value of paper currency diminishes along with the prospects for global economic growth. Ideally, investors should aim to have 7 to 8 percent of their assets in gold, above the wealth management industry's average of 3 percent, said Gary Dugan, Coutts chief investment officer for Asia and Middle East. He believes gold may rise towards $2,000 in the next several months, supported by short to medium-term factors including purchases by emerging market central banks.

"What's happening in precious metals is that they are becoming more mainstream," Dugan said, adding that ten years ago investors rarely held any gold in their portfolios. "Some of the clients ask where gold prices are going, and I say don't even think about prices. It's a store of value...We are going back to normality, and the normality is that precious metals are the core part of your portfolio..."

HSBC analyst James Steel said that the underlying bullish case for gold is intact given the prospect of loose monetary policy for years to come, ongoing central bank purchases of bullion and demand from major gold consumers such as China.

Commerzbank analysts see ultra-loose central bank monetary policy, increased fears of reduced purchasing power, currency devaluation and strong investment inflows in gold supporting its price. The euro-zone crisis is a dominant theme as well, with Spain thus far refusing to seek help and the International Monetary Fund raising concerns about ongoing capital flight from euro-zone peripheral countries. "Against this backdrop, the gold price remains well supported," the analysts noted.  Commerzbank expects that gold may rise towards $1,800 per ounce.

David Beahm, VP of Marketing and Economic Research at Blanchard & Co., said, "Gold is reasserting itself as a strong safe haven during the current period of risk and uncertainty. The European debt crisis remains a major issue in the global economic marketplace, and other major indicators in the U.S. and abroad continue to illustrate just how feeble the economy remains. Many investors have moved into gold to protect and grow their wealth, and we foresee global investment demand for gold to grow even further than the 900 percent increase it has seen since 2007."     

David Jollie, strategic analyst at Mitsui Precious Metals, said, "gold still remains a virtual currency in the eyes of many people and can act as a form of last ditch insurance. Given the strains that currently exist in the global economic system, we expect gold to continue to benefit from heightened risk and increased perceptions of risk."

Tower Trading President Anthony Neglia said gold may "punch up" through $1,800 per ounce very shortly.

"Gold has reclaimed the multi-year uptrend that it broke below in May, and this could act as support if we see a pullback," said IG Markets chief markets strategist Chris Weston in a note. He expects gold may target $2,050 per ounce in a few months.

OCBC Bank analyst Barnabas Gan maintained his year-end target forecast for gold at $1,850 per ounce, noting "sustained bullish sentiment."

"The medium to long-term outlook is still bullish," said Li Ning, an analyst at Shanghai CIFCO Futures.. "The continuous safe-haven demand, as well as lack of confidence in paper currency, will probably push gold to a new high later this quarter or in the first quarter next year."

Paul Horsnell, head of commodities research at Barclays, said "quantitative easing for us is not the rising tide that lifts all boats, it's not as straightforward as loose monetary policy must lead to higher commodity prices, with perhaps one exception....It is good for gold."

(Sources: "UBS raises gold, silver, copper forecasts," Mineweb, October 12, 2012; "PRECIOUS METALS: Gold Slips in Light Trade; Platinum Falls," Wall Street Journal, October 12, 2012; "Credit Suisse lifts '13 gold view 7% to $1,840-oz.," Marketwatch, October 12, 2012; "Precious metals analysts more bullish on gold and silver," Mineweb, October 11, 2012; "Gold gains after four-day drop; watching euro," Reuters, October 11, 2012; "Gold futures pare gains after jobless data," Marketwatch, October 11, 2012; "Gold investment should double on persisting economic woes – Coutts," Mineweb, October 10, 2012; "PRECIOUS-Gold retreats with euro, mounting concern on growth," Reuters, October 10, 2012; "Gold hews to tight range on global growth worries," Marketwatch, October 10, 2012; "PRECIOUS-Gold steadies as dollar strengthens," Reuters, October 9, 2012; "Gold seesaws, vies to extend losses a third day," Marketwatch, October 9, 2012; "PRECIOUS METALS: Gold Rises in Asia; Likely to Be Rangebound," Reuters, October 9, 2012; "Neglia: Gold May ‘Punch Up' Through $1800," Bloomberg, October 8, 2012; "PRECIOUS-Gold dips as upbeat US jobs data saps buying interest," Reuters, October 8, 2012; "PRECIOUS METALS: Gold Higher in Asia; US Jobs Data Eyed," Reuters, October 5, 2012; "Gold, silver keep losses after payrolls," Marketwatch, October 5, 2012; "Analysis: Investors opt for gold ahead of U.S. "fiscal cliff," Reuters, October 5, 2012; "PRECIOUS-Gold comes off 6-1/2 month peak hit on banks' stimulus," Reuters, September 19, 2012)

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