On the heels of a 2.1% loss for gold last week and news that hedge funds have gone way short, gold bugs could perhaps use some cheer. Enter analysts at Bank of America Merrill Lynch who say the worst days for the precious metal may be over.
In a note to clients Monday, metals strategist Michael Widmer notes how gold prices
have stabilized this year thanks to steady physical demand from emerging markets — China and India absorbing mine and scrap supply — which has helped compensate for investor selling. In the future, he says, that balance will sway in gold’s favor:
“We believe that physical demand from emerging markets will gain further clout in the medium term as countries get more affluent, suggesting the worst may be behind the gold market.”
Of course, he says, don’t expect all smooth sailing from here. For now, investors in developed markets remain marginal buyers and gold tends to be bought and sold around macroeconomic “themes.” In 2013 rising nominal rates and falling inflation expectations — the ultimate bear pit for gold — led to major portfolio adjustments running against gold. Unfolding normalization of the global macro economy and implications for rates/inflation should keep a few headwinds going, Widmer says.
But while those headwinds remain, he doesn’t see a repeat of 2013 happening. That’s because natural interest rates are falling for several reasons and because inflation expectations should gradually pick up along with global growth. And as B. of A. Merrill Lynch recently pointed out, gold and oil prices are correlated, and longer-dated oil prices look cheap on several measures, which Widmer says backs up their view that gold prices should be bottoming. Therefore the return of volatility seen in 2013 is not likely.
Echoing some of B. of A.’s thoughts, Julian Phillips, in his Gold and Silver Market Morning note, explained just why those Asian buyers are so important to gold, and less fickle than their western counterparts. Asian buyers are not all about short-term and short-term profits, trusting gold and silver as long-term investments, and only buy when they feel the price has dropped too much, he says. They are fully confident in the long-term and rarely sell for profit reasons alone, so buying is “persistent and on-going.” Phillips argues the technical picture remains positive for both gold and silver.
Hedge funds cut bullish gold bets for the first time in six weeks in the week to July 15. Commodity Futures Trading Commission data show short holdings jumped over 30%, which was the biggest rise in 7 weeks. Just you wait. GotGoldBlog sees gold and silver as resilient and thinks “mercenary swap dealers with the most and largest gross short positioning for gold” are vulnerable to a short squeeze, if the position is right.
“…at some point, gold and silver are going to catch a tail wind strong enough that those attempting to prevent runaway breakouts could be overwhelmed. It is in such cases that the trader community on the COMEX becomes its most cutthroat and merciless,” says GotGoldBlog.
– Barbara Kollmeyer
More must-reads from MarketWatch: