Is Gold Back?
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Is Gold Back?

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After slumping in 2013, gold has moved higher this year on worries over the Ukraine crisis and U.S. economic growth. While miners have welcomed the rally, the battle between the gold “bugs” and bears still appears far from decided.

“Gold excites people,” Nick Sheard, chairman of Australian minerals explorer Carpentaria Exploration, told The Diplomat. “If you’ve ever panned gold, when you see that speck of gold you get quite excited and it’s the same with investors.”

He added, “Gold is still considered a reserve currency and whenever there’s a crisis you see strong buying.”

With a range of gold projects in Australia’s New South Wales state, the company is hoping the recent rally continues. Gold companies including Indochine Mining and Kingsgate have recently capitalized on the upward trend to raise millions of dollars of capital from investors.

Price Zig-Zag

The precious metal surged 70 percent from December 2008 to June 2011, helped by investors’ risk aversion and more than $2 trillion of monetary stimulus by the U.S. Federal Reserve. It reached a record $1,923 in September 2011, prompting speculation it could test its 1980 all-time high in real terms of $2,300 an ounce.

Currently trading at around $1,300 an ounce, gold has rallied this year after a horror 2013 when it dived by nearly 28 percent, hitting a low of $1,188 in its worst performance in 32 years.

The dive was worsened by selling from exchange-traded funds (ETFs), which abandoned the precious metal amid expectations of higher U.S. interest rates, after having been big buyers during the global financial crisis.

Yet according to the World Gold Council, last year saw the largest increase in jewelry demand for 16 years, with China overtaking India as the world’s biggest retail market. Gold imports into the United States rose for the first time in eight years, with central bank buying increasing for the fourth straight year.

On the supply side, reduced recycling due to lower prices caused supply to contract for the second consecutive year.

Commenting on the data, the council’s Marcus Grubb said in a press release: “2013 has been a strong year for gold demand across sectors and geographies, with the exception of western ETF markets. Specifically, it was the year of the consumer. Although demand has continued its shift from West to East, the growing demand for gold bars, coins and jewelry is a global phenomenon.

“Taken together, the statistics demonstrate the resilience of the gold market and the unique nature of gold as an asset class, rebalancing to reflect the economic environment.”

‘Barbaric Relic’

Nevertheless, gold also has its critics, not least of which include U.S. billionaire investor Warren Buffett, who has described gold as “an unproductive asset.”

“You can knock almost any investment and nothing happens. But when you talk about gold it’s different…[gold bugs] want everybody to get so scared they run to a cave with gold,” he told CNBC, adding, “Caves might be a better investment than gold – at least they’re not producing more caves all the time.”

The Australian Financial Review’s David Bassanese has noted that despite last year’s drop, gold prices remain high by historical standards, well above their 40-year average of $730 per ounce in real terms (adjusted for U.S. inflation).

According to Bassanese, the gold price rally was fostered by doubts over the strength of the U.S. recovery and whether the Federal Reserve would cut back on its money printing. The recent announced reductions in Fed stimulus, together with signs of improved U.S. growth should therefore cause gold prices to weaken.

“The main driver of lower prices last year was reduced demand for gold exchange-traded funds (ETFs), which led to an 880-tonne decline in required physical stock holdings by institutional ETF providers. That’s substantial, but still represents only about a third of the 2644-tonne run-up in ETF gold holdings since 2004. More ETF selling is likely to come,” he warned, describing gold as a “barbaric relic.”

On Monday, gold extended its biggest weekly retreat since November, dropping to $1,325 an ounce in Singapore on speculation of future U.S. interest rate hikes. According to Bloomberg News, commodities analysts at Societe Generale and Goldman Sachs have both forecast weaker gold prices, with Goldman’s Jeffrey Currie predicting it will fall below $1,000 an ounce.

“Gold is going to be somewhat problematic from an investment standpoint over the next six to 12 months. We’re probably looking to a relatively higher and quicker increase on rates, which is a headwind for precious metals,” Frost Investment Advisors’ Ted Harper was quoted as saying.

Producer Strike?

However, increased tensions in the Ukraine or another major international crisis could spark a rally in gold prices, as would any signs of slower recovery in the world’s biggest economy, the United States. Expectations of higher inflation have reportedly prompted some investors to hold gold as a hedge.

ANZ commodities analyst Victor Thianpiriya told the Sydney Morning Herald that Chinese buyers would step in again once gold prices moved lower. Despite expecting a drop in the short term, the bank still expects gold to reach $1,450 an ounce by the end of 2014.

Another bullish forecast has come from Canaccord Genuity, which recently raised its average gold price estimate to $1,354 an ounce over 2014-18, and long-term forecast to $1,455.

“Given the worries of further potential corporate bond defaults in China and global geopolitical tensions between Russia and the West over Ukraine, we see potential for the gold price to rally further in the near term,” it said in a note to clients.

Carpentaria’s Sheard cited another reason for the price to remain strong: producers.

“The all-in cash cost for producing an ounce of gold worldwide averages close to $1,200 – this sets a floor on the price as whenever it drops near that level, supply starts falling and the price comes back up,” he said.

Sheard said now was the best time to be exploring for gold, “because the downturn in the gold price has seen many majors withdraw from exploration, leaving the field more open. Once the price gets back to the $1,400 to $1,500 range, capital will be far easier to obtain from investors.”

With the shift in demand to the East, gold producers can only hope that China increases its appetite for the yellow metal, even while Western traders keep a wary eye on the Fed.

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