Gold Prices Set to Climb

The price of gold could increase above a range of $2000 per troy ounce even by the end of the year according to the most recent Thomson Reuters GFMS Gold Survey 2011 update. The primary catalyst for gold price appreciation is the strong investment demand; however, jewellery related purchases also proved to be a resilient support, with a reported increase of 7.5 percent despite a 25 percent increase in the price of gold over the same one year period. Investment demand is driven by global concerns over sovereign debt, poor confidence in paper currencies,  and a low interest rate environment are strong factors to underpin the institutional and retail interest in gold. These combined dynamics produced a ‘perfect storm’ for gold investment, which recently sustained the price of gold through the $1900 per troy ounce level, from which it has subsequently retreated.

Volatility is the new norm

Some analysts and observers believe fluctuations in gold price could plague the gold market in coming weeks as speculators and traders struggle on a general consensus and global policymakers consider increasingly desperate measures to stabilize wide spread economic concern. Global financial markets have been subject to extreme price movements as investors grew increasingly alarmed by the ability of euro zone leaders to resolve regional debt crises that have already enveloped Greece, Portugal and Ireland and now remain poised to threaten Italy and Spain. Gold investors have already seen some movement since the Swiss National Bank stunned markets recently with its globally influential decision to peg the franc to the euro by acquiring virtually unlimited amounts of foreign currencies to curb its appreciation.

Operation twist

Indicators and data out of the United States seem to imply stalling growth at a time when the Federal Reserve has a diminished set of tools to modify the domestic economy. The Reserve has already vowed to keep interest rates near zero and buy trillions of dollars of government bonds. On an interview with BNN, Tim Quinlan, Economist at Wells Fargo Securities explains the “operation twist” expectation for the Federal Reserve concerning the “notion that they essentially would sell short dated treasuries and buy longer dated treasuries has traders trying to get ahead of this trade. That is what is keeping a lid on yields.”  The notion behind this is that the government could encourage housing and business investment by lowering long-term rates and at least not encourage gold outflows by maintaining short term rates. The hope from the Federal Reserve is that this flattening of the yield curve is partially going to resolve some of the unemployment troubles that the United States has been struggling with. Gold investors could see the recent demonstrations as ad hoc policy measures which are unlikely to materially change an increasingly difficult problem for the United States.

Gold equities set to rally

On Wednesday, Chief Executive Officer for Sprott Private Wealth, David Franklin, explained to BNN that gold equities are well positioned to see an upside correction, “the most mispriced gold stocks are the majors. Any of these majors are in production, generating cash flow, and have the ability to use that cash either to pay dividends or acquire junior miners. We have seen the gold price go back from $200 all the way up to $1800 and the gold stocks as measured by the HUI Index have not moved significantly. We think there is a huge opportunity in the majors at the moment.” In terms of putting a target price on the potential for a correction, “If you look at historically the HUI Index in the last 2 years over this same time period, the price of gold has moved up 20 to 25 percent, between the September to December timeframe, which is seasonally high for gold. I think that is an easy target in the next three to four months.”

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.