Chinese demand, the US election and the outlook for gold over summer - Steel
"We are probably going through the correction now, the second half of the year is likely to be a little better"
Interviewer: Geoff Candy
Posted: Thursday , 10 May 2012
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GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is James Steel - he's a precious metals analyst at HSBC. James if we look at what's happening in the gold market at the moment, a lot of people historically have said "sell in May and go away" and we're now in the second week of May and clearly that advice over the last two years or so hasn't really been as good as perhaps it could have been, historically. How do you see the market placed as we head towards the northern hemisphere summer?
JAMES STEEL: Well I think a lot of it is going to be geopolitical - one of the things that boosted the gold prices last summer, summer of 2011, was the budget fiasco in the US Congress and that primed us in June and July. The budget is again scheduled to come up but more like the fall this time, when the House has to agree to another debt extension limit. If we get the same fiasco that we had last year, it's likely to be quite positive for the market. Also we have the US presidential elections in November so that might keep the gold market on the boil throughout the summer depending on how the opinion polls go. And I think historically "sell in May and go away" is really more related to the stock market than to bullion because don't forget we have the Indian monsoon that starts up in June, and we'll have to see how good that is, or how poor it is. That is often a pretty good barometer for Indian demand, and then as I'm sure as your listeners and readers know, Indian demand this year has been very poor, and that's one of the things that has tracked the gold market down.
GEOFF CANDY: Let's talk about the Indian market quickly - I do want to ask your thoughts on the likely impact of the US election, but if we look at Indian demand, it has been fairly poor. We did see a jump on the Day of Akshaya Tritiya which was expected. How strong do you expect Indian demand to be throughout the rest of this year?
JAMES STEEL: Well it will probably recover from these levels but these levels are very low and we had a sort of one-two punch to the Indian market. One was the Indian budget which proposed the increase in doubling the tariff which resulted in the jewellers protest for 21 days which shut down a large part of the market. And secondly, the very poor performance of the Indian rupee which is making gold in local currency terms very expensive, so if the rupee can stabilise and we can sort out what the tariffs are going to be and we get a moderately good monsoon, then I think we stand the likelihood of the market recovering in the second half of the year. But the weakness in the first - particularly in March and April - was quite pronounced.
GEOFF CANDY: There's been a lot of talk by a number of commentators talking about the fact the chances are we are still in a longer-term uptrend for gold prices given all the macroeconomic factors that haven't really changed. If anything, they've potentially gotten worse. But how do you see things at the moment on a longer-term level and do you go along with the sense that perhaps we're still likely to see a correction before this bull market comes to an end?
JAMES STEEL: Well I think probably we're going through the correction now or around now. The second half of the year is likely to be a little better - if we don't get continual declines in the unemployment level, then discussions about further stimulus are going to reappear and that would likely be supportive of the gold market. Now longer-term I think that we might actually have a shift and if you look years out we might actually have a shift back to the jewellery market. And one of the key reasons that I'm bullish on gold going forward, is that we know that mine supply is going to be reasonably limited and we also are fairly clear that even though there have been some problems in the world economy recently, and there's been some slowdown in India and China, that over the long haul the middle classes, particularly the upper middle classes, are going to continue to increase income in large portions of the globe. And particularly in areas that have a high predilection towards owning gold. So it wouldn't surprise me at all if we see greater physical demand at the retail level for jewellery products in India, and coins and small bars and jewellery products in India and China and other related emerging market countries are going forward because of an income impact. Not necessarily because the macro climate is very favourable for gold, although I think the macro climate is favourable also.
GEOFF CANDY: It's interesting you talk about that perhaps one of the fears potentially on the slightly more bearish side of the gold market, is that, if or when investment demand does start coming off as economies recover and so on and so forth, we're likely to see the investment side of the market falling off and the concern being that jewellery demand might not be able to step in enough to pick up the slack. How do you view that?
JAMES STEEL: Possibly in the near term there might be some dislocation between - or very often investment demand moves more abruptly and can be more volatile than jewellery demand which tends to be slower paced. So there might be a gap between when jewellery can take over fully and when the investment market drops. But I suspect that would be reasonably temporary and if we get a further price decline it would probably stimulate physical bullion demand.
GEOFF CANDY: Are you of the view that we will see a decrease in investment demand?
JAMES STEEL: I think it might moderate, it has moderated and it might do so further depending upon monetary policy and how the dollar goes. But if we get more quantitative easing or if we get some sort of additional stimulus, if we get an operation twist too, because the Federal Reserve thinks it will put the kibosh on the QE3, but if we get some sort of additional monetary easing then you can't count the investment out... at least not in the short-term.
GEOFF CANDY: The gentlemen at Bullion Vault have done some interesting work in terms of looking at what's been happening over the last few months and they took a look at some of the charts and among two of the findings that they came up with was one that we've seen a very quiet period over the last 40 days or so in terms of volatility and the range at which the gold price is trading, and the other one is a seldom occurrence is that for gold to fall for three months in a row. Should we be reading anything into those two pieces of information?
JAMES STEEL: They sound very interesting - unfortunately I haven't had the purview yet to be able to look at them in depth. Now there's an old saying in the futures market that says "never be short in a quiet market, because anything that happens can have an exaggerated impact" and I think that the market volume maybe has moderated a little bit and the market has been kind of quiet but we are really in a 10-year bull market and on a great macro level or on the larger macro level I can't see what has really turned it around.
GEOFF CANDY: Looking forward through the rest of this year what particular touch points are you going to be looking at or keeping an eye on that could potentially move the market. I'm thinking of the likes of the US presidential election for example?
JAMES STEEL: Yes clearly the election itself, particularly if it's going to be close, will be important, also the distribution of the House of Representatives in the US Congress. But that's not to say that over the geopolitical issues are going to be important this year, not just in the United States. The political process will either elect or select countries that have a total GDP of more than 50%. So countries will change their administrations, or renew their old administrations that total most of the world's productive capacity this year - China, Russia, France, the United States and others and so they have to be taken into account as well in addition. Let's see if we're going to get another budget deficit fiasco in the US and also how the eurozone sovereign debt issues pan out. Our foreign currency team are more positive on the euro later in the year and if that occurs and the dollar weakens, particularly if the focus can shift across the Atlantic away from the eurozone where the markets have been concentrated on, towards similar although not identical problems in the United States, and that weakens the dollar, then that could be a bouncing board for gold to go higher.
GEOFF CANDY: Just two questions to close off with, the first one being that we'd be remiss if we didn't talk about China. How do you see that market playing out through the rest of this year?
JAMES STEEL: Well I think the reason that the market isn't down more because of the dearth in Indian demand is because China has taken over some of the slack, so I think that's going to continue to be to support the market going forward, and the Chinese demand is quite stable.
GEOFF CANDY: And finally there does seem to be the feeling that perhaps slightly more optimistic feeling about gold right now on the market. Is that something that you would go along with or is this something perhaps that one should take heart from, from a gold investment point of view?
JAMES STEEL: Markets never go just one way. Gold's had a magnificent ride out for the last several years. The high was around 1920 - at the beginning of September of last year or the end of August and we are down $200 to $280 odd since then, I think that's quite a reasonable correction, and I think maybe the market is more sober going forward. But the other thing I would add by the way is that central banks may not be done buying gold. They were very good buyers last year and we know they were good buyers in March, so I suspect if we got any significant price declines - their foreign exchange levels, their dollar holdings are still increasing, both for petroleum exporters and traditional exporting areas in China elsewhere and that may tempt their central banks to come in and purchase more bullion which I think would also support the market this year. |
