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Gold Price Seen As Nearing Its Peak

Gold Price Seen As Nearing Its Peak
March 09 2005 - Australasian Investment Review – (AIR)

Most technical chartists seem to agree with the view that gold is still in an uptrend, though some expect the US$ price of bullion to drop first before bouncing back to a new 16 year high.

Analysts at BCA Research agree with the underlying uptrend direction for gold, adding gold usually leads commodities in general, suggesting the current craze in base materials still has enough stamina to take spot price rises further.

At the same time, however, BCA warns that its gold indicator has already started to "roll over", indicating the precious metal may have already landed in a trading range.

The idea of gold in a trading range had also been suggested by the precious metals experts at HSBC in London on Monday.

BCA believes that its indicators are signaling that we’re heading towards a peak in commodity prices. Under the motto "mining stocks lead commodities" the experts point out US mining shares have priced in 25% earnings growth for 2005 (2.5 times the broad market) and this means that a lot of good news is already discounted for. In addition, the slowing pace of the bull market in mining stocks is another sign that the cycle in commodities is now "mature", BCA believes.

At CommSec the precious metals specialists believe a turn in gold’s fortunes will not come before mid-year. In the meantime, the US$ gold price could easily reach the high of last year (US$455/oz), the analysts believe, however, they "feel" that the tide is about to turn for the USD (and hence gold) around mid 2005.

As the recent price action shows, US$400/oz is within pretty easy reach if the market’s USD sentiment does turn, CommSec highlights.

BCA Research would no doubt agree with CommSec’s US dollar focus. BCA doesn’t expect the USD to necessarily strengthen over the course of the year, but the specialists point out that ongoing investment strategies based on continued USD weakness seem to contain a few remarkable flaws.

Firstly, it is in no one’s interest to see a significantly weaker US dollar, BCA points out, as this would stoke US inflation and boost US bond yields. Fed tightening would accelerate and the result would be a bigger economic slowdown. Outside of the US, rising currencies would inflict deflationary pain and produce falling prices. Not a scenario too many policymakers will feel comfortable with, to say the least.

Also, BCA believes none of the Asian central banks have any reason to stop intervening to suppress their currencies and drive the US dollar lower as long as there is no inflation. Currently, inflation in most of these countries is receding, the experts say.

Nonetheless, the reality of the dependence of Asia on the US has not stopped Asian central banks from making it obvious that they do not like holding so many US dollars as reserves, BCA acknowledges.

However, the analysts add, the problem for Asian countries, with the exception of China, is that any attempt to diversify out of the greenback simply leads to stronger currencies and that is still an unattractive proposition.

BCA’s view finds support at CommSec where the experts state that after three years of falls, they suspect that the greenback has now completed the bulk of its decline.

CommSec too doesn’t expect the USD to spring back sharply, but believes there could be modest rises. If this is the case, and if the strong correlation between USD, gold and the Eur/USD is maintained, gold could start to weaken in the second half of 2005, CommSec believes.

Probably of greater importance is that CommSec analysts worry that in a relatively illiquid (gold) market, a potential "rush to the door" might result in gold falling by more than would be suggested purely by the EUR/USD’s decline.

"We don’t really buy the argument that portfolio diversification flows demands an enduring, set commodity (or specifically gold) exposure", the analysts stated earlier this week, adding if an asset class looks vulnerable in the coming year or two, the best performing hedge fund will be the one that lightens up in the most timely fashion.

Also, the funds could even take significant short positions, a move that would really take the gold price down "a peg or two", the broker believes.

Experts at JP Morgan keep a bullish bias towards gold but had to concede this week that their view on the precious metal is now on collision course with their USD outlook. "We have been suggesting that the rally from [US$]411 has been impulsive and therefore the start of a run back towards the [US$]457 highs, but right now that does not fit with the USD view", the broker’s FX and Commodity Technical Analysts reported.

Contrary to CommSec, JP Morgan believes gold’s anticipated price fall could be more benign than the corresponding EUR/USD depreciation.

"The last time we saw the USD rally significantly saw the EUR$ drop to around 1.27. Gold managed to stay in a range for the majority of that time. It did relent in the end to the 411 lows but held over key 409 support", the experts recall, adding "We may see a similar process again, especially as the commodity currencies are expected to outperform. 424 certainly seems to be on the cards, if not 420/418."

Copyright Australasian Investment Review.
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