Doom And Boom Forecasts On Gold And Oil After Price Slide

Traders and Investors remain sideways, as market movements remain limited due to lack of any major participation based on confusion regarding future price trends. Stock markets continue their uptrend despite record and rising national debts. The real scenario is that the current issues and trends are not just as simple as made out to be.

No Bubble in Gold Market:
Following the recent landslide, the Gold price has temporarily dropped by 30% from its September 2011 record high of $1,920, and by a good 25% from the interim high in October 2012. Against this backdrop and in the light of the recent downtrend, many market observers argue that a bubble has burst. After all, the price of gold was on a continued uptrend between 2001 and 2012 and had increased seven-fold in the meantime. This can by no means be justified by the general (rather moderate) price trend, as the real gold price – adjusted for the US consumer price index – has also risen markedly and continues to be well above the long-term average even after the recent plunge. However, a bubble is mainly characterized by the last price rise showing exponential growth, directly followed by a sharp price slump.

In the past fifteen years there have been two known bubbles on the financial markets that meet this criterion: During the New Economy bubble and the oil price bubble, which burst in March 2000 and July 2008 respectively, – equities/prices remained on a continued uptrend over a multi-year period and increased exponentially at the end. In the seven months preceding the all-time high, the NASDAQ Composite nearly doubled. More or less the same can be said for the oil price in the first half of 2008. Gold, on the other hand, edged up by “just” 30% between January and early September 2011, which was practically on a par with the average annual price trend up until 2010. Immediately following the record high, both the NASDAQ and the oil price went on a sharp downturn. By year-end 2000 – within nine months – the NASDAQ Composite halved, and oil recorded the same losses in just three months. For gold, however, the picture is different. Between the all-time high of September 2011 and the recent plunge, 19 months passed, and in the three months following the record high, gold fell by a “mere” 20%. A bubble, which bursts after such a long time, would be a quite exceptional event.

A gold market bubble, which basically showed the so-called typical characteristics and which was even more pronounced than that of the NASDAQ or that of the oil price, is not unprecedented. Back then, the price of gold doubled within less than two months, and two months after marking the record high, it had nearly halved again. Given the evident differences between this trend and that emerging in the last three years, a comparison with the current situation is, in fact, superfluous. Like in 2011, investment demand back then also constituted around 40% of total gold demand. But, according to the World Gold Council, the share of Europe and North America this time amounts to less than 50% of investment demand, which is down markedly from the bubble phase (over 70%). The share of China and India, on the other hand, rose to almost 40% last year, whereas it was negligible 33 years ago. Demand from these countries ought to have been much more sustained than that from the western industrialized countries, as they are not seeking to hedge against the collapse of the financial system. Instead, rising incomes and the inflation rate, which is generally higher in this region, ought to have been major investment motives.

There is another big difference between 1980 and today: the price fall then was triggered by a considerable tightening in U.S. monetary policy. The U.S. key interest rate was raised from 11.5% to 20% between October 1979 and March 1980, which triggered a sharp rise in real interest rates and made gold less attractive from an investor’s perspective. An earlier end to the Fed’s asset purchases is possible now, but imminent rate hikes by the Fed are out of the question, never mind on a scale witnessed 33 years ago. It should also be noted that gold continues to account for only a small proportion of the portfolios of private investors despite the ongoing price rise in past years. According to the World Gold Council, private Gold Holdings accounted for only about 1% of global financial assets in June 2011. Even considering all the gold already mined, this still amounts to merely 6% of global financial assets.

Given the arguments against a gold market bubble, gold is unlikely to remain on a sustained downtrend. Private investors already regard the current price levels as buying opportunities. Following the recent decline in prices, demand for gold coins and bars has already increased visibly. U.S. gold coin sales topped 100,000 ounces in one week, an amount that is not often sold in a whole month. In China, too, traders report an “exceptional” physical demand. In the key gold-consuming country, India, demand for gold should also receive a strong boost from the price decline. The current situation is more reminiscent of the temporary sharp downtrend in October 2008 than of other bubbles. Back then, the price of gold also dropped by around $200 per troy ounce within two days, but recouped the losses over the coming three months. In autumn 2008, the downslide of gold also coincided with a decline in commodity prices and a downward revision to global growth expectations. On the back of this, investors‘ strong fears of rising inflation abated visibly. About 4.5 years ago, like in recent days, mostly short-term investors backed out of the gold market, but then returned in the following months.

A further factor supporting prices is the ultra-loose monetary policy of central banks in the industrial nations. Real interest rates continue to be extraordinarily low as a result, which suggests that investment demand will recover in the course of the year. The recent decisions of the Japanese central bank have sparked fears of a global depreciation race among many financial market participants. This should also boost the demand for gold as an alternative currency. This time, however, it might take longer before gold goes on a new uptrend, as the sharp losses have shattered the status of gold as a safe haven and a store of value.

Gold ETFs are still recording outflows; this amount to over 300 tons since the start of the year, meaning that all inflows since November 2011 have now been reversed. An exaggeration appears to have formed last year in this segment of the gold market at least and is now being corrected. On the back of this, investors are likely to remain cautious in the near term. Over a three-month horizon, the bank therefore expect gold to stabilize at $1,400 per troy ounce. In the second half of the year, investors‘faith in gold is likely to return gradually. For the fourth quarter, Commerzbank analysts reckon with an average gold price of $1,650 per troy ounce. Reporting Source: Bullionstreet

Gold Seen Tumbling toward Support at $1,227: Contradicting View – Bloomberg:
Gold’s rally from a two-year low may not endure as the metal will probably drop to test a key support at $1,227.20 by the end of the year, according to technical analysis by Commerzbank AG. Bullion for immediate delivery rallied 4.8 percent in the past two weeks through May 3 after entering a bear market last month. The metal touched $1,321.95 an ounce on April 16, the lowest level since January 2011. Cash gold advanced 0.4 percent to $1,476.61 an ounce by 1:40 p.m. Seoul time. The “current minor bounce” should be followed by a decline toward the support of $1,307.80 and $1,301.12, where the 2011 low and 50 percent retracement of the 2008-2013 increase are found, London-based analysts Karen Jones and Axel Rudolph said in a report last week. If the levels are breached, the 2009 high of $1,227.20 will become the next support, they said. Gold Prices slumped 12 percent this year after rallying for the previous 12 years. Holdings of global exchange-traded products backed by the metal have declined 14 percent this year to the lowest since October 2011.

The Oil and Gold Boom are over: – Bloomberg
The wreckage caused by China’s great, juddering slowdown continues to spread far beyond the country’s shores. Although most commodities enjoyed a bounce on May 3, after better-than-expected U.S. employment data, the plunge in their prices over the past few months suggests the past decade’s rally is truly broken. For those of us not in the mining industry, this is actually good news — one of the best signs yet that the global economy is returning to normal. China’s voracious demand for every conceivable raw material — oil, steel, soybeans, gold, to name a few — once seemed to spell a future of endlessly rising commodity prices and falling living standards in developed nations.

For the first time, U.S. pension funds started to allocate a share of their holdings to commodities. Even the US Federal Reserve got involved, inadvertently, by printing so much money that a good portion of it wound up fueling speculative bets on China and the big emerging markets, often using commodities as a proxy. Prices went parabolic. From 2000 to 2011, copper prices rose 450 percent, oil prices 365 percent, and gold prices more than 500 percent to a high of more than $1,900 an ounce. There was talk of oil hitting $200 a barrel, and gold reaching $10,000 an ounce. It was a wild time, all predicated on the idea that the rise of China had set off a commodity “supercycle” that could keep prices high indefinitely.

Commodity prices, such as that of gold, tend to rise when faith in the financial system is in decline and usually fall when confidence is high. High commodity prices enrich a class whose corrupting influence is legend, and whose chief skill is the ability to secure the right political contacts. Meanwhile, high commodity prices, particularly for oil, squeeze the poor and the middle class, and act as a brake on growth in the industrial world. During the 2000s, the U.S. fretted over the rise of corrupt oil tycoons and unstable dictators in nasty petro-states, and rightly so. That’s why falling commodity prices — both gold and copper are still down more than 10 percent this year despite the latest bounce — are good news. The China-commodity connection is breaking. After three straight decades of ultrafast growth, China’s inevitable slowdown has let air out of the bubble: Since the peak in April 2011, the broadest available measure of commodity prices has fallen 16 percent. In recent months, money has started flowing out of exchange-traded funds for most commodities.

Commodity-price booms restrain demand, while attracting money and innovation to increase supply, which leads to a bust. – Ruchir Sharma – head of emerging markets and global macro at Morgan Stanley Investment Management

Now, as emerging nations begin to embrace energy efficiency as well — China is working hardon electric cars, for instance, despite continuing to build dozens of coal plants — global demand might flatten out this decade. The debate over “peak oil” scenarios may shift from the threat of dwindling supply to the threat of peaking demand. Certainly, the world is no longer terrified of running out of important commodities. High prices have drawn investment to copper mines, aluminum smelters and other basic sources of supply. In the past decade, the amount of capital invested in the energy and materials sector, which includes most non-farm commodities, has risen 600 percent, compared with an average increase of 200 percent in other sectors.

The much-discussed boom in U.S. shale-gas production is only one result of this spending: Since 2001, China has increased output of industrial metals by striking multiples, from about 140 percent for iron-ore commodities to 775 percent for nickel. For the last 200 years, the average price of commodities has followed this predictable cycle: one decade up, often sharply, followed by two decades down, with the result that real prices haven’t risen since 1800. There are exceptions to the rule. Some commodities, including oil and copper, have gained somewhat in real terms. But gold has just retained its value.

The price today (about $1,500 an ounce) is roughly the same as in 1980, when adjusted for inflation. If the historical pattern holds, we are now entering a long period of falling commodity prices, which could last two decades. That is good for importers such as the U.S., as was the case in the 1980s and 1990s when commodity prices were falling. The current fall in retail gasoline prices should increase the purchasing power of the American consumer and offset the fiscal drag from the government sequestration cuts. Meanwhile, the nations that have reveled in the commodity boom of recent years are likely to face a disheartening return to the mundane ordeals of normal life. Buddhist monks have a phrase for it: “After the ecstasy, the laundry.”