Gold Investment "Supported by Geopolitics" But "Too Weak" to Drive Prices Higher, Say Analysts

[The Machine]

 

 

GOLD INVESTMENT and wholesale prices continued last week's late rally Monday morning in London, rising to $1317 per ounce even as the US Dollar gained on the currency market.

 

World stock markets fell as the United Nations urged a ceasefire between Israel and Hamas in Gaza, and Dutch investigators reached the MH17 crash site in eastern Ukraine.

 

US Treasury bonds and commodity prices were flat overall with crude oil steady, but corn prices hitting 4-year lows as analysts agreed the US and European harvest outlook is strong.

 

India's monsoon rainy season – seen by some analysts as a key driver of gold investment and jewelry demand in the No.1 consumer nation – continued to pick up this weekend after its weakest start in 5 years.

 

Silver tracked gold investment and wholesale prices, also pushing recovering half of last week's 4.1% drop at $21.07 per ounce.

 

"The worst may be behind the gold market," says a note from Bank of America Merrill Lynch, forecasting that "physical demand from emerging markets will gain further clout in the medium-term as countries get more affluent."

 

For now, however, gold investment demand – especially from the rich West – accounts for "the marginal buyers and [so] gold tends to be bought and sold around macro-economic 'themes'."

 

"In the short term, geopolitical concerns may keep gold well supported, subject to speculative sentiment," says Jonathan Butler at Japanese conglomerate Mitsubishi.

 

With the death-toll rising to 500 in Gaza, and pressure on Russian president Putin continuing over claims Moscow-backed separatists shot down Mayalsian airliner MH17 over eastern Ukraine, "The geopolitical situation across the globe should cushion any further sell-off," agrees a note from refining and finance group MKS, "but the risk remains to the downside."

 

Latest data on US gold futures and options show speculators trimming their bullish bets and raising their bearish investment positions ahead of last week's spike in prices when news broke of MH17 broke.

 

Accounting for bearish contracts, the so-called "net speculative long" position slipped below 500 tonnes equivalent for the first time since June on last week's data from US regulators the CFTC.

 

Gold investment through exchange-traded trust funds also dipped at the end of last week, with the giant SPDR Gold Trust (NYSEArca:GLD) retreating from its fastest growth since October 2012.

 

"The surge in investment [through gold futures and options] only took the price back to the levels of March," says a report from Societe Generale's precious metals analyst Robin Bhar, "when investment was appreciably lower."

 

Compared to futures and options positioning, Bhar goes on, gold ETF investment "is unlikely to drive prices higher", because such investors "tend to be more conservative" than chasing momentum, only investing "with a longer time horizon in mind.

 

With gold investment through ETF trust funds at 60% of its peak, "There would be reluctance from those that had their fingers burnt," SocGen concludes, pointing to the price-drop of one third from 2011.