‘Shock absorbers’ prevent volatility in gold price

By Paula Wallace

Continuing a 'good decade for gold'
Tony Parry began by telling attendees of the Australian Gold Conference that he is a not a “$2,000-an-ounce-gold-man”.
The analyst from Resource Capital Research (RCR) said he did not subscribe to the high-gold price scenarios suggesting that demand fundamentals will get in the way.
Before calamity struck financial markets last year, in the middle of 2008, gold had briefly broken through the $1,000-an-ounce barrier. There was a weakening trend in the US dollar, and commodity prices and forecasts for the growth of global GDP were both strong.
Was the subsequent crash a once in a lifetime opportunity for gold bulls? We have to ask that question, said Parry.
“Given all that (global financial crisis), why didn’t gold soar to the sorts of heights that many gold bulls feel it would soar to even in average times let alone the absolutely astounding times we had in the past four quarters?
“In reality gold did shine in 2008…it did hold its value, it was a rock. Overall, despite a lot of fluctuation, it was up about five per cent over 2008 after the two last quarters of dramatic collapse.
“The other asset class to look at…that outperformed gold was the US dollar. I think it’s very important to remember that the US dollar was a similar if not better store of value during 2008 than the gold price.”
During the crisis period there was also a massive increase in safe haven investment demand but that was countered by falls in price, fabrication demand and bar and coin demand, and a surge of recycled gold coming onto the market.
“So these factors are basically gold shock absorbers that are preventing very high volatility in the gold price,” said Parry.
Last year also saw a decoupling of gold from commodity price movements and a breaking away from traditional relationships such as that with oil, according to Parry.
RCR’s gold price forecast is for US$950-1,000 an ounce in the first half of 2010. It believes the US dollar is likely to continue to maintain a positive momentum on the gold price.
“We see the US dollar being countered by increased risk appetite for other asset classes, less safe haven demand and we see the inflationary issue started to push gold stronger towards 2011,” said Parry.
Overall, he said it had been a very good decade for gold particularly in the last five years with a strong bull market in the US dollar gold price, “…starting off the decade at about $300 an ounce…but now we find gold up at $1,048 an ounce last time I looked.”
He said a key issue was the A$ gold price, taking the example of Catalpa Resources – an Australian producer which has sold forward a significant amount of its gold production, which is planned to commence next year, at a price of A$1,557 an ounce.
“When you do that as a CEO sometimes you’re cast as a villain later on if the price moves ahead of that or you can be a hero if not,” said Parry.
But in Catalpa’s case, he thinks it will probably come out a hero for its shareholders in coming years - RCR considers it a low probability that the gold price will hit A$1,500 anytime soon.

Outlook for the Australian dollar
“In terms of where we are on the spectrum of pessimism or optimism, we’ve spent most of our time in the optimistic camp,” said Joseph Capurso, currency strategist, institutional equities & debt capital markets, Commonwealth Bank of Australia (CBA).
He told conference attendees that the likely implications of the Reserve Bank’s recent raising of interest rates for foreign exchange is that the US dollar would remain weak. Capurso said this will continue until the US Federal Reserve signals that it is willing to tighten monetary policy.
“And then when that happens the US dollar we expect will rise against pretty much all currencies,” said Capurso.
“But the strongest currencies, at least in the initial phase of the global economic recovery, we think will be the commodity currencies, so Aussie, Yen, Canadian dollar, and also the Asian emerging markets’ currencies.”
The CBA sees the Australian dollar going from about 90-91 cents today up to a peak of about 98 cents by the end of June next year. These are end-of-quarter forecasts, that is, forecasts of where the CBA thinks the Australian dollar will be on the last day of the quarter.
Because of volatility, the CBA believes “there’s a very good chance the Aussie dollar will break through into one Aussie dollar buying one or a little bit more than one US dollar.”
This is likely to happen around the middle of next year, however currency markets can move rapidly and it could happen soon than that, according to Capurso.
What are the risks to that forecast?
“We think that given the way the economy’s playing out…the biggest risk to the Aussie dollar is that the US dollar strengthens across the board as the US economy improves.
“Another risk which we place less weight on is that there are downward revisions to global growth, that it’s a little bit more drawn out because we’re only half way or so through working out the financial problems.”
The CBA sees three main influences on the Australian dollar – interest rate spreads (say compared to US interest rates); how the US dollar performs against the major currencies; and commodity prices.
“We think the US dollar is going to remain weak against most of the major currencies like the Yen, like the Euro and the Pound for the rest of this year and into the early part of next year.
“Given where we are at the moment it looks like China and Asia more broadly is going to lead the world economy out of recession and that’s very important for commodity currencies like the Australian dollar.”
The CBA believes the Australian dollar can move a bit higher, maybe another 10 per cent, however recession induced by financial crisis tend to be deeper and the recovery could be more drawn out than economists are currently expecting.