Published on July 30, 2010 12:20:00 IST
By Walter de Wet
Although gold has fallen sharply from the highs reached in June we believe gold will still head higher towards the end of the year despite the current price action. While we are seeing strong physical demand for gold already (refer to our physical flow index in Commodities Daily 27 Jul’10), we believe investment demand for gold will remain in place.
Liquidity (as we measure it when analyzing gold) is ample and interest rates are low; as a result investment demand for gold is likely to remain in place. We view liquidity and interest rates as fundamental drivers for gold investment demand.
We measure global liquidity as the US Fed balance sheet plus global foreign reserves holdings excluding gold. YTD, our measure of global liquidity is up 9.4%. The gold price is up 8% YTD.
As ETFs are accessed by institutional and retail investors, ETFs is an important vehicle for liquidity and low interest rates to be channeled into gold demand. Given the rise in liquidity it is not surprising that total ETF holdings now stand at 2030 tonnes — up from 1,800 tonnes at the start of May.
Since the start of 2009, gold ETF holdings have increased almost 72%. Liquidations by ETF’s have also proved to remain low with minimal liquidation in the face of heightened market volatility in the past two years.
Given the relationship between liquidity and commodities, we have found that gold specifically are the main beneficiary. In fact, gold has been shadowing global liquidity very closely. While short-term, other factors such as equity price movements and currency moves influence the gold price, we believe these factors are not long-term drivers.
For example, rising equities and a rising gold price between 2003 and 2007 are not consistent with an argument that gold should fall when equities rise over a longer time horizon. Equities also rose since mid-2009 and gold pushed higher at the same time.
Until either interest rates start to rise or liquidity decline, we believe gold’s investment case reains intact. We have not seen any evidence yet that either of the two will move against gold. When we see this evidence will reconsider our longer-term view on gold. Our target for gold remains $1,300 on a six month horizon.
Courtesy: Standard Bank
From Commodity Online published on July 30, 2010 12:20:00 IST
