Global investor and central-bank demand will support gold prices, underpinned by Asian demand for jewellery in the short- to medium-term, according to Bank Sarasin’s latest commodity strategy, “Gold still in demand for the time being”. Bank Sarasin expects gold to trade at USD1,575 by end- Q3 2011 and USD1,650 by end-Q2 2012. But Bank Sarasin, which no longer recommends long term gold exposure, advises investors to watch for sustained interest rate increases. Then investors are likely to unwind gold positions in favour of higher yielding assets. Rising production could also pose price risks.
With the European debt crisis showing no signs of abating, and on-going concerns about the US government’s sovereign credit rating, gold prices have continued to rise driven by investor demand. Slowing global economic growth will give gold additional support, as any rate hike, particularly in the US, seems further in the future, pushing down real yields. At the same time, rising inflation in Europe and the US has raised the spectre of stagflation, encouraging gold purchases. Central banks, too, have become net buyers of gold, and Bank Sarasin expects this trend to continue.
Jewellery demand is forecast to put a medium-term floor under gold prices. China, in particular, has a strong impact, with jewellery sales up 21 percent year-on-year (yoy). In China, the removal of restrictions on investing in physically-backed gold ETFs is also driving prices. These ETFs are very popular due to high domestic inflation and limited domestic investment opportunities.
Meanwhile, jewellery demand in India rose 12 percent yoy despite a 25 percent yoy increase in average gold prices, Sales are expected to surge during the Indian wedding season in the second and third quarters. Together, China and India account for 63 percent of global demand for gold jewellery and thus are important market drivers.
Eliane Tanner, commodity strategist, says: “We expect investment demand to remain robust in the coming months, supported by jewellery demand in emerging markets, particularly China and India. But investors need to keep a watchful eye on interest rates. A sustained rise will see investors unwind their gold positions in favour of higher yielding assets, so we no longer recommend long-term gold exposure. Investors should be ready to take profits on a reversal in interest rates. That could be as early as mid-2012.”
However, increased gold production may put a damper on upside potential. Gold mine supply is expected to continue to rise on the back of strong demand and high prices In the meantime, central banks, traditionally listed on the supply side, became net buyers. In Q1 2010 they were net buyers of 59 tonnes, surging to 129 tonness in Q1 2011 to surpass total central bank purchases in 2010 and become the most important factor in the four percent decline in gold supply in Q1 this year.
While European central banks have stopped sales, emerging markets central banks are buying in order to diversify their foreign currency reserves. As a result of strong investor and central bank demand, and jewellery purchases, Bank Sarasin increased price targets in the short- to medium-term, but expects prices to soften when interest rates start rising on a sustainable basis.
With the European debt crisis showing no signs of abating, and on-going concerns about the US government’s sovereign credit rating, gold prices have continued to rise driven by investor demand. Slowing global economic growth will give gold additional support, as any rate hike, particularly in the US, seems further in the future, pushing down real yields. At the same time, rising inflation in Europe and the US has raised the spectre of stagflation, encouraging gold purchases. Central banks, too, have become net buyers of gold, and Bank Sarasin expects this trend to continue.
Jewellery demand is forecast to put a medium-term floor under gold prices. China, in particular, has a strong impact, with jewellery sales up 21 percent year-on-year (yoy). In China, the removal of restrictions on investing in physically-backed gold ETFs is also driving prices. These ETFs are very popular due to high domestic inflation and limited domestic investment opportunities.
Eliane Tanner, commodity strategist, says: “We expect investment demand to remain robust in the coming months, supported by jewellery demand in emerging markets, particularly China and India. But investors need to keep a watchful eye on interest rates. A sustained rise will see investors unwind their gold positions in favour of higher yielding assets, so we no longer recommend long-term gold exposure. Investors should be ready to take profits on a reversal in interest rates. That could be as early as mid-2012.”
However, increased gold production may put a damper on upside potential. Gold mine supply is expected to continue to rise on the back of strong demand and high prices In the meantime, central banks, traditionally listed on the supply side, became net buyers. In Q1 2010 they were net buyers of 59 tonnes, surging to 129 tonness in Q1 2011 to surpass total central bank purchases in 2010 and become the most important factor in the four percent decline in gold supply in Q1 this year.
While European central banks have stopped sales, emerging markets central banks are buying in order to diversify their foreign currency reserves. As a result of strong investor and central bank demand, and jewellery purchases, Bank Sarasin increased price targets in the short- to medium-term, but expects prices to soften when interest rates start rising on a sustainable basis.
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