Very often the contrast between what is happening with the gold price and its underlying fundamentals compared to bank analysts’ predictions, is noticeable. We frequently comment on the ease in which mainstream analysts change their forecasts, drawing attention to the fact that as they clearly cannot predict the future they ‘adjust’ the price expectations according to events they failed to foresee.
Even when forecasts are not involved, the mainstream still fail to report on true gold demand, instead deciding to rely on flawed data such as that offered by the World Gold Council on Chinese gold demand.
However, Lawrie Williams of Mineweb believes that there is a very slow shift in sentiment happening amongst mainstream analysts. Whilst many are loathe to change their long-term predictions, there are some who are feeling that small increases in the gold price are entirely possible.
We have stated a number of times here that the bank analysts are effectively totally reactive in their analyses and forecasting of precious metals prices – indeed they tend to follow the herd and with gold performing rather better than they had anticipated so far this year (up 11.5% since the December 31st London fixing) some are already beginning to increase their predictions sharply, although admittedly others have stuck to their bearish forecasts so far. However how long they continue to do so if gold maintains its recovery remains to be seen.
Whether there is a real recovery in the U.S. economy in particular or not – a recovery suggesting that investors will continue to support the general equity market rather than gold (which is perhaps the view most quoted by bearish analysts like Jeff Currie at Goldman Sachs) – there are other drivers out there which should remain positive for gold and suggest that the recent gold price recovery could perhaps be sustainable.
As we have stated here before, a turnaround in the draining of gold from the big gold ETFs is a perhaps underestimated driver in this respect. Even if the gold price falls and sales out of the ETFs resume there’s no way they are likely to be anything like on the scale seen last year with over 800 tonnes of gold coming onto the markets from this source creating a huge imbalance in the supply/demand metric. Thomson Reuters GFMS suggests that this outflow was perhaps the key element behind last year’s gold price falls, so any reduction in sales from this source should be positive for gold. Indeed if current gold price levels are sustained then the indications are that last year’s ETF outflows could be replaced with inflows and say a 200 tonne inflow would effectively make a 1,000 tonne difference in supply/demand figures which would be very positive for the gold price. Indeed were this to occur it could be more than self-sustaining with rising gold prices pushing more and more investment back into the big gold ETFs.
And, despite a Bloomberg headline suggesting the contrary, Chinese gold demand looks like it could be continuing at last year’s high levels where estimates of imports range from around 1,500 tonnes to over 2,000 tonnes depending on whose statistics one believes.
So some of the bank analysts now seem to be coming round to the possibility that gold prices could just perhaps rise this year, as against the almost unanimous consensus back in January that they were more likely to fall. For example, UBS analyst Edel Tully has sharply revised upwards her short term and medium term gold price predictions in the light of the latest moves. She is now looking to $1280 as her one month average forecast – up from $1180 which has already been comfortably surpassed – and $1350 in three months, up from $1100, while a removal, or easing, of India’s import controls could push gold to $1400. But she still doesn’t see the gold price as deserving of a tag north of $1400 – but also recognises a fall to below $1200 is similarly undeserved. Now with gold this morning at around the $1340 level, Tully’s forecasts, although substantially higher, could still be seen as overly conservative by some observers.
Likewise RBCCM’s Toronto-based analytical team have revised their long term gold and silver price assumptions to $1,400 and $23.50 respectively, from $1,300 and $22 previously, commenting that the price of gold seems to have taken U.S. Fed tapering in its stride, ETF outflows as having ‘slowed’ and with physical demand remaining strong. They feel the price risk with respect to gold is now to the upside.
In truth, the longer gold can sustain its recent gains, the more sentiment towards it as an investment in its own right, or as a safe haven, will return. But a sharp crash in price could reverse all this gradual change in perception very quickly, and as we saw last year gold can be prone to some very sharp and rapid price falls for whatever reason. One can’t rule this out from happening again.
Thus analysts like Goldman Sachs’ Jeffrey Currie, Soc Gen’s Robin Bhar and Credit Suisse’s Tom Kendall are all still predicting $1,050 gold this year – or even lower. Kendall commented recently that he wouldn’t be surprised if gold were to trade at $1,300 (which of course it has already exceeded, but that the momentum thus achieved would be quickly exhausted and he anticipated gold falling back to $1,000 towards the end of the year.
But the very fact that some, if not yet the majority, of bank analysts are breaking ranks and looking to even small increases in the gold price does suggest sentiment is changing towards gold. They will always be conservative in their forecasts – that’s the nature of bankers, but the unanimous bearish consensus may be beginning to shift.