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Thomson Reuters GFMS Gold Outlook for Next Three Months:

Date of Release: 5th April 2013

IMPORTANT NOTE: The following is for informational purposes only and was developed by Thomson Reuters GFMS. It does not take into account the investment objectives, financial situation or particular needs of any particular person. Information is from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Opinions and estimates are the judgment of Thomson Reuters GFMS and are subject to change without notice. Distribution of this information does not constitute agreement with, or an endorsement of, the views expressed. Obviously, future outcomes are impossible to predict with certainty. Investors should obtain advice based on their own individual circumstances and understand the risks before making any investment decisions.

March saw gold continue the downward trajectory (notwithstanding a brief recovery in mid-month) that began in October 2012, with the price closing the month 6% below that at the start of 2013. This also marked its second consecutive quarterly loss, a development last seen in 2001. In addition, despite growing geopolitical tension in the Korean Peninsula, the yellow metal suffered another fall in early April, dropping to $1,546.50 on the 4th (last visited in may 2012) before bouncing back above $1,560 at the time of writing in response to a weak us jobs report.

Gold’s weakness year-to-date has been largely related to increasing optimism towards the US economy, which has encouraged investors to pile money back into the equity market. Along with this has been an absence of immediate inflationary pressure in many advanced economies, which has also reduced gold’s safe haven appeal, especially given a degree of satiation among potential investors. Meanwhile, in spite of gold’s impressive rally over the last decade, allocations to bullion by so-called “real” money managers have remained trivial, which has also called into question whether the gold bull market is approaching an end soon. On the physical front, despite price weakness, support from Asia has also turned out to be somewhat disappointing. In India, growing bearish sentiment and expectations of further price retreats seem to have undermined interest from the jewellery trade. In China, bargain hunting has remained fairly limited from jewellers, as the second quarter tends to be a quiet period for sales on a seasonal basis.

Turning to the outlook, the gold price is likely to remain sensitive to the US economic data, which may provide more clues about the duration of the Fed’s current asset purchase programmes. While the yellow market is still vulnerable to further investor sell-offs, prices are expected to be firmly supported at $1,530, on the back of decent bargain hunting and continued interest in bullion as a means of reserve diversifications from the official sector.

Following a period of consolidations in the mid-to-high $1,500s, gold is likely to embark on a renewed rally as we move further into the second quarter. As discussed in our latest Gold Survey 2013, despite some improvements, the US economy is still fragile, which is likely to see the Fed maintain its current easing programme throughout 2013. More importantly, there is a continued lack of confidence that ongoing debate in the United States, most immediately relating to budget cuts and further raising the debt ceiling, will smoothly arrive at a satisfactory and timely resolution. Given that the equity market is trading at near-record highs at the moment, we are sceptical that such gains could be sustained over the next three months, especially if doubts about the US government’s ability to restore long-term debt sustainability resurface. In Europe, even though much of its economic outlook is largely priced in, there remains significant potential for gold-friendly shocks, as evidenced by the price uplift seen in mid-March on the back of the situation unfolding in Cyprus.

As such, there is still a good chance that investor interest in gold could recover over the forecast horizon. In addition, as speculative long position have been reduced to low levels, this should leave scope for a healthy increase in the price, with a high of $1,670-1,680 likely to be tested before July.

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