Inflation Bias "Creates Bias for Higher Gold Prices"
Monetary policy is still the main driver in the gold market...
CONSISTENTLY cited by Bloomberg as one of the most accurate metals forecasters, Deutsche Bank head of metals research Daniel Brebner says he does not think gold has lost its safe haven status. Brebner discusses the prospect for Gold Prices over the short and long run in this interview with Hard Assets Investor.
HAI: We haven't seen Gold Prices rally this year, despite all the negative headlines from the Eurozone and even here in the US. This is in contrast to last year, when gold climbed relentlessly to its record high above $1,920 amid similar bad news. Why is gold behaving differently this time? Has it lost its safe-haven status?
Daniel Brebner: I don't think it's lost its safe-haven status. The Gold Price has been reacting to a risk-aversion environment, which is linked to perceptions of low growth globally. Growth issues have been emerging not only in Europe, but also increasingly in the US and in China. This is creating deflationary pressures and deflationary risks, which is resulting in a liquidity squeeze.
You're getting a lot of investors moving from risky assets into the US Treasury market, which has been the key beneficiary. So it's been a function of two things—deflationary risks, which pushes people toward cash vs. assets—and liquidity, which pushes investors from, again, those risky assets into more-liquid safe assets. And, of course, the US Treasury market is extremely deep in that respect.
So I think that's one of the key reasons for gold's poor performance in Dollar terms. And I may just remind you that this is in Dollar terms that we're looking at this. If you look at the Gold Price in Euros, or in Indian Rupees, or Russian rubles, of course the performance is going to look very different.
HAI: So gold is being traded as a risk asset right now by many traders, in your view?
Daniel Brebner: I wouldn't call it a risk asset. It's certainly being traded as a secondary risk aversion-type asset, yes. It's still very much a safe-haven asset. But in Dollar terms, certainly it's been underperforming other safe-haven assets, particularly the US Treasurys or short-term US Treasurys.
HAI: What do you see as the biggest driver of Gold Prices for this year? Is it the Fed, Europe or something else entirely?
Daniel Brebner: I think it's likely to be, in the near term, actions by the Fed. We are heading toward two important points over the next couple quarters. One is the fiscal cliff in the US, which is the re-imposition of taxes or the removal of the Bush tax breaks. Then there is the debt ceiling issue that the US will hit later on this year.
Combined with continued weakness in the US economy, this could result in further actions by the US Federal Reserve. The kind of actions I would be expecting would be accommodative policy measures, QE3 potentially being one of them. And this would underpin a new move higher in the gold market.
HAI: What factors do you think will dictate whether the Fed will initiate QE3?
Daniel Brebner: Certainly employment will be a key factor. If we see unemployment numbers start to tick up, then that will put further pressure on the Fed to act. Also, if there is a continued deterioration in the manufacturing space within the US, that will do the same. You might just note that the strength in the Dollar, of course, is not good for US exports. And I don't think it's in the US' best interest to have a strong Dollar going forward. While it may not be explicitly acknowledged by the Fed, I think central bank would much rather see a weak Dollar to help to support US industry.
So it's a number of factors which will push the Fed into taking some action. Now that may be somewhat limited by political issues. There may be some political hurdles to jump over before we do see that. And that's one of the risks—if the Fed isn't able to act like it would otherwise do, because of political pressure.
HAI: I imagine your outlook for gold for this year is going to vary, depending on what the Fed does.
Daniel Brebner: I still have to forecast these things. Right at this point of time, I'm expecting to see Gold Prices remain fairly moribund over the summer period. I don't think we're going to see much movement. I think $1,550 to $1,625 will probably be the range. And then, maybe into September, we may see a little bit more activity, where the market perhaps starts to expect or anticipate Fed action. At that point in time, we're likely to move above $1,700. And then maybe move higher towards $2,000 into the beginning of 2013.
HAI: You mentioned that range of about $1,550 to $1,625. Is there any scenario where you could see gold falling below that range, below $1,500 even?
Daniel Brebner: Sure. That's certainly the possibility if political intransigence increases, especially in Europe. There's been some evidence of that in China, but it's certainly not as big an issue as it's been elsewhere. If we see it in the US and decisions cannot be made and we go into a crisis which is somewhat unresolvable, then you go into high deflation mode. And there's a big scare. Certainly, gold could move lower in that kind of environment. And that's when you'll get more and more assets moving into things like US Treasurys.
We're in a very polarized environment, where we could see Gold Prices fall in a severe deflationary situation, or rise significantly under a more inflationary-biased situation. Right now we're in a trading range, but it's very unlikely that that's going to be sustained and we're going to move one way or another by the end of the year. It'll either be considerably higher, or we may see a sharp move lower.
HAI: We've seen a sharp contrast in the demand trends for China and India. Can you explain what's going on there?
Daniel Brebner: The Indian situation is something that's been a bit more structural. We've had a decline in the jewelry consumption in India for many years now. This is a function of several factors. One is that they are fairly price sensitive. As prices continue to rise, particularly in Rupee terms—I would note that Gold Prices in Rupee terms have hit all-time highs recently—the appetite for gold naturally wanes. Conversely, as Gold Prices fall in Rupee terms, you see it pick up.
It's been a component of gold demand which has been decreasing. But it's something that has been highly uncorrelated with the Gold Price. It's not something I'm too concerned about, as it has not been a major factor in determining why Gold Prices are priced where they are.
The Indian situation will continue to be one that's secondary or tertiary, in terms of impact on the gold market. Overall gold consumption by India will continue to decline, but it doesn't concern me.
One related issue is the fact that the Indian central bank has been a buyer of gold. That is something that is actually more important for gold and is reflective of a broad-based bias by central banks in Asia and near Asia to bolster their reserves with different assets or different currencies, gold being one of them.
In terms of China, we're moving toward a lower growth environment. It's starting with the recent CPI numbers coming out lower than expected. There's a potential deflationary situation emerging within China. It's unlikely to become a big issue; nevertheless, with less money moving around in China, with less credit available, you're getting less of that excess money being put into various assets such as gold. That's been one of the reasons why there has been a general softening in buying.
That said, you still have extremely strong demand numbers coming out of Hong Kong, which suggests that there is still very much an interest by Chinese investors in Buying Gold and diversifying by putting some of their money into different kinds of assets, and getting it out of China in general.
The China story is a supportive one for the gold market overall. There are still big questions as to how the People's Bank of China is building their gold reserves over time. There's very little news as to where that stands currently, but I suspect it's continuing to be built.
HAI: Do you see gold as a good place to invest over the long term? The short term?
Daniel Brebner: It is probably one of the best places to put your money over the medium to long term. Over the near term, everything is facing considerable pressure. There is some modest support for gold and I don't expect to see a correction downwards in the gold market. There's just too much of a bias to avoid deflationary pressure in the Western world. I think we'll see a continued movement by central bankers to do everything to avoid that. Deflation in a high-debt environment, a high-debt economy, is extremely risky. And so growth will continue to be stimulated by expansionary monetary policy.
The bias is towards inflation and that will create a bias towards higher Gold Prices rather than lower Gold Prices. Even though I'm not expecting to see Gold Prices move too much, I still think it's a fairly good place to be, even in the near term.
HAI: What would signal the end of the gold bull market, given that we've already risen 11 straight years?
Daniel Brebner: That is a very good question. The key factor in my mind that will signal the end of a gold market is a willingness by central bankers to support the value of their currencies. What that means is higher interest rates. If we see interest rates move higher to more normal levels—and what I mean by "normal" is historic, average levels—then certainly there is a fundamental support for those currencies. And that means gold has less of a role to play in currency markets.
If we were to see that, or there was the potential that was going to happen in the near term, the prospects for gold would look much less promising and I'd be more negative. But I don't see that happening any time soon.
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