INTERVIEW: Gold Prices to Bounce Higher As Jewelry Demand Picks Up Investor Slack: Macquarie

Wednesday July 10, 2013 2:23 PM

(Kitco News) - Gold prices are oversold and should end the year higher as the market restructures itself, said Matthew Turner, precious metals analyst at Macquarie Commodity Research.

In an interview with Kitco News, Turner said the gold market has been volatile recently because it is in the midst of rebalancing away from investor demand and back into its more traditional role for jewelry demand.

"This is a huge change for the market and its going to take time to find the right price," he said.

On March 4 the bank issued a report saying that they were bearish on gold prices and expected the price to hit $1,250 per ounce by 2014. Turner said that now that forecast seems quite tame compared to what actually happened, which was that gold ended the second quarter down more than 25%, with the final London gold fix at $1,192.

Since then prices rebounded. Spot prices are modestly higher and as of 2:20 p.m. EDT was trading at $1,262.90 an ounce, up $12.20 on the day.

The massive selloff prompted the firm to reevaluate their forecast in a report released July 1.

According to the report, although there is the potential for a further short-term fall, Macquarie is expecting gold prices to average the year at $1,467 and end 2013 at $1.370. With a neutral supply and demand outlook, they are expecting prices to remain fairly stable for the next five years with an average target of $1,473 for 2018.

"The worst quarterly price performance for gold in at least 103 years has led to a depressed gold market with even long-time bulls turning bearish," the report said. "…but after such a big price move down we're tempering our bearishness."

Turner said there are a number of factors that should help support gold prices at their current levels but the biggest one is the demand for physical gold, especially in the jewelry industry.

Turner added that despite the massive outflows from investors, especially in exchange-traded products, the market has managed to absorb most of the extra supply, albeit at much lower price. Strong demand in China, India and Turkey helped to even out the gold supply.

The fact that lease rates have spiked higher in the last few weeks, low inventories in Comex vaults and futures contracts close to being in backwardation, demonstrates there is an interest to take possession of physical bullion.

Prices could still drop as more supply comes into the market, but Turner said he would expect that to also get absorbed as demand remains high. Turner added that in the early 2000s, jewelry demand was about 60% stronger than what it is today and it is possible for the industry to get back to those levels.

"It's possible for the world to consume that much gold, it's just a question of at what price," he said.

Macquarie has mostly focused on the growth of the jewelry market and Turner said the biggest surprise was the retail demand for coins and small bars. Although this has been a factor in supporting gold prices, Turner said he doesn't expect the trend to continue.

"If the gold price remains low you would think retail investor demand would slow from the highs we've seen," he said. "Jewelry is the key."

Turner said demand from central banks will also be an important factor for gold's performance. Although the firm is not expecting to see a massive increase in central bank buying, the trend will be steady, which Turner added means there doesn't have to be a massive spike in jewelry demand.

Macquarie is also not ready to call an end to investor demand. Turner said he thinks that the expectations the Fed will have exited its quantitative easing measures by mid-2014 is slightly exaggerated. As an example, he said, gold prices have moved modestly higher as investors reevaluated the strength of Friday's employment numbers.

"The trend for gold has been to sell the hawkish noise and ignore the dovish noise," he said. "We think that could change as Fed tapering will be slower than expected."

Turner said that the biggest threat to their outlook could come from India as the government's battle against gold imports is working. In June, gold imports fell to 31.5 metric tons after a record 162 in May.

Turner said it finally appears that the government's measures to weaken gold demand appear to be working; however, he does not expect to see this much weakness in future months.

Read the latest news in gold and precious metals markets at Kitco News.

By Neils Christensen of Kitco News

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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