Futures Outlook - An Excerpt from CRB'S Futures Market Service
Dollar rally creates negative medium-term outlook for gold
Spot gold prices in the past two months have fallen sharply by a total of $166 per ounce or 13.5% from the record high of $1226.40 posted on December to the current 3-month low of $1061.30. That sell-off retraced only a small part of the extraordinary rally in gold prices during 2005-2009 when gold prices tripled from the $400 area to over $1200 per ounce. That rally was driven by the generally weak dollar and by the massive global reflation effort that has been mounted by the world’s largest central banks to prevent the global economy from falling into a depression following the September 2008 banking crisis.
Moreover, a huge amount of investment demand for gold has emerged in the past several years with the advent of gold exchange-traded funds. Gold ETFs in 2009 purchased 573 metric tons of gold, bringing the cumulative total to 1,762 metric tons, according to the World Gold Council. ETFs are now the 6th largest holder of physical gold behind only the IMF and the central banks of US, Germany, Italy and France. ETFs hold more gold than the central banks of China, Switzerland, Japan, Russia, the ECB and all others.
Yet gold prices have been correcting lower for the past two months and we believe the medium-term fundamentals for gold are bearish. Bearish factors include reduced demand for gold at such high prices, long liquidation pressure after the long rally, and the dollar. The dollar is the single biggest driver of gold prices. Regression analysis shows that the dollar index explains 67% of the level of gold prices. The dollar index has rallied sharply in the past two months, thus pressuring gold prices. We look for the dollar rally to continue due to the improvement in the US trade deficit ex-petroleum and the problems for the euro posted by budget problems in southern Europe. Moreover, we believe it is too early for gold to get any fundamental support from inflation worries since deflation is still the biggest risk and any true inflation threat may be another two years away. Therefore, we look for gold to work its way lower in the coming months to correct more of the extraordinary rally seen during 2005-09.
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