Gold gets closer to its turning point

The yellow metal appears to be close to a low point in the cycle.

Summary: The falling gold price is approaching the key level of $US1050 an ounce, which some investment banks say is the low point in its cycle. A strengthening US dollar makes the yellow metal look less attractive. But physical demand from China is firming and the Swiss central bank could be set to boost its holding, which would signal to other central banks that gold is back in favour.

Key take-out: If $US1050 an ounce is the bottom then gold is within 10% of the target. This level could encourage earlybirds to build positions ahead of any future turn.

Key beneficiaries: General investors. Category: Gold.

One more step down – that’s the best way of looking at gold, which has been falling for the past three years. The commodity is nearing a price of $US1050 an ounce, which has been tipped by a number of investment banks as the bottom in the cycle.

How quickly it gets to that target, or whether it overshoots and tests the $US1000/oz mark, are the two critical questions for investors with an interest in gold to consider.

As with uranium, another metal in the news over the past week (see The uranium bounce), gold is being buffeted by competing positive and negative forces.

The biggest problem for gold is that its great rival in the safe-haven investment class, the US dollar, is continuing to strengthen as economic growth accelerates in the US. This will eventually lead to higher interest rates, exposing gold in its pure bullion form as a zero-return asset.

Gold’s long slide from a peak of $US1895/oz in September 2011 to around $1164/oz today has been marked by a number of recovery attempts, none of which lasted long.

As was reported here seven weeks ago (see Gold: Only half way to the bottom?, September 17) a fall below $1100/oz has been widely seen as inevitable given the metal’s declining appeal as an investment.

Back then gold was trading at $US1236/oz but quickly retreated to around $US1145/oz earlier this month, a price which meant it was less than $US100/oz from the low-point target.

As gold gets closer to the $US1050/oz mark first proposed by analysts at the investment bank Goldman Sachs, it is likely that sentiment will change.

Chinese buyers have been among the most active in the gold market over the past few months, outstripping Indian buyers for the first time (see Adam Carr’s Why the gold price could push higher, October 22).

Paul Horsnell, head of commodities research at Standard Chartered Bank in London, said last week that there was a floor price for gold of around $US1100/oz set by Chinese retail demand.

“Physical demand indicators out of China and India are firming,” Horsnell told the Bloomberg news service.

Another potentially important factor which would help slow the pace at which the gold price has been falling, and possibly reverse the fall, is the likelihood of the Swiss National Bank becoming a big buyer of gold.

While not guaranteed, the Swiss Government’s central bank could face a demand from voters to buy more gold if a referendum scheduled for November 30 is successful.

The question in the nationwide vote is whether Switzerland should boost its official gold holding from 8% of total assets to 20% as a way of preserving the country’s wealth.

If carried, the government will be obliged to buy up to 1500 tonnes of gold (and perhaps more) as it expands the current gold stake from 1040 tonnes to around 2500 tonnes.

Any purchases are likely to be spread over several years but if the Swiss re-enter the gold market it would send a powerful signal to other central banks that gold is back in favour.

While China, India and possibly Switzerland are developing a fresh interest in gold as the price hovers near a four-year low the same cannot be said for US or European investors.

In the US gold is being sold at the fastest rate in a decade thanks to the rise in value of the US dollar and the promise of higher interest rates on savings.

Trying to pick gold’s high or low point is a mug’s game. A more sensible approach is to look at the trend which, for the past three years, has been down.

With positive factors such as Chinese buying entering the equation it would be prudent to see the rate of decline slowing and a bottom forming in the gold market, perhaps around that original target of $US1050/oz.

But if $US1050/oz is the bottom then gold is within 10% of the target, a level which could encourage earlybird entrants into the market seeking to build a position ahead of a possible future turn.