While conditions remain for a possible investor-led — and probably short-lived — return to levels of more than $700 before year-end, there are more substantial grounds for gold prices to drift sideways to down over the year, Natexis Commodity Markets said in its precious-metals outlook on Monday.
It said the gold market was exceptionally volatile in the second quarter, trading in a range of $567 to $725 per ounce.
“The correction to $567 on June 20 and the volatility seen in July highlights the downside potential if investment interest wanes. The dollar has once again been a key driver following the weakening of the link earlier this year. Recently, the dollar has been reacting more to interest-rate differentials rather than the twin deficits.
“Investor interest is also in part being sustained by the latest wave of geopolitical instabilities, such as North Korea’s missile testing, the Gaza and Lebanon incursions and Iran’s nuclear programme, and there is always the chance that these crises could fizzle out. Lastly, a reminder needs making of the risk that investor profit-taking snowballs into active shorting as technical signals turn negative,” the London-based metal brokers said.
Buying on dips, and in greater quantities, might continue to characterise the physical markets, it added.
“However, to expect great strength here could be wishful thinking. Buyers have been slow to return to the market in the wake of recent price volatility, and a more lasting recovery in offtake is said to be dependent on greater price stability or a gentle retreat.
“The remaining fundamental drivers, in fact, tend to point to sagging prices. Mine production, for example, remains forecast to rise a few percent while dehedging is not expected to return to previous years’ elevated levels, instead remaining at middling volumes. Lastly, scrap should stay at historically buoyant levels due to still high prices, even if down on the surging quantities seen during the April/May price spike.
“In conclusion, while the conditions remain for a possible investor-led (and probably short-lived) return to levels over $700 before year-end, there are more substantial grounds for prices to drift sideways to down over the year although physical demand and, to a lesser extent, central bank buying cushion any downdraft from investor selling.
“And not all investors may be inclined to sell quickly — ETF holdings, after all, have shown remarkable resilience to date. As a result, a price average for 2006 of around $600 could materialise, dropping off a little further in 2007,” Natexis said. — I-Net Bridge