Analysts at BofA Merrill Lynch and Morgan Stanley are telling clients that gold is set to rally as Indian festival season gets underway.
In a note to clients today, BAML analysts led by Michael Jalonen write:
Last week, the gold price rose 3.5% ending Friday at $1,316/oz. This belied considerable intra-week volatility as bullion fell to an intra week low of $1,255/oz before rallying sharply (some $60/oz) due to the end of US Government shutdown and an expansion of the debt ceiling. Interestingly the gold holding of SPDR Gold Shares (the world’s largest gold ETF) declined by 1% (8.8 tonnes) to 882.2 tonnes, the lowest level since February 9th 2009. Year-to-date 2013, the gold holding of SPDR has declined by 438 tonnes (-34.6%), a major reason why bullion has declined by 21% ytd 2013. Looking ahead, history would indicate that November is usually a strong month (with an average monthly gain of 3.8% in November) for gold prices thanks to the wedding and festival season in India. Thus we believe that bullion could mount a modest rally to the $1,350-$1,400/oz range over the next month or so.
Morgan Stanley analyst Paretosh Misra agrees.
“Indian festival season could provide a lift to gold,” writes Misra in a note. “Traditionally, the Diwali festival (specifically, Dhanteras, the two days before Diwali) is the biggest gold buying period of the year in India.
“In the last 10 years, gold has risen an average 2.5% in the one month around Diwali. While government’s new import restrictions and INR depreciation could adversely affect gold imports, buying should be supported by ~20% YoY decline in gold in Rupee terms.”
Société Générale analysts Jesper Dannesboe and Robin Bhar, however, believe any such rally would be very limited.
In a note to clients Friday, Dannesboe and Bhar wrote:
Short-term speculators appear to have accumulated substantial short positions over recent weeks but they were squeezed by a seasonal pick-up in Asian physical demand. Physical premiums in Hong Kong and India have risen recently and the gold forward curve this week moved into slight backwardation at the very front end of the curve. This tightness in the physical gold market is likely to be short-lived as the pick-up in Asian physical buying is partly seasonal and partly opportunistic (on big price drops) while ETF selling continues on a trend basis and we expect no significantly mine supply cuts until the gold price gets down to below $1,000/oz.
It is difficult to say exactly how much further the gold price can rally on the ongoing short- covering but we would be surprised to see the gold price much above the $1,350 level. The medium-term drivers of the gold price are, in our view, still firmly bearish. The US economy is in recovery mode, US real interest rates have risen and are likely to trend higher as the recovery gains strength, inflation is very subdued, Fed tapering, while perhaps somewhat delayed, should be completed next year.
Goldman Sachs head of commodities research Jeffrey Currie is also bearish on gold in his latest note to clients, but warns that it’s not time to short it quite yet.
“We continue to argue that the key to the gold outlook is data that shows a strong US recovery and gives the market confidence that tapering will begin,” says Currie.
“We still believe that this is the key trigger for gold prices even as the risks of deferred tapering have increased.
“Accordingly, we still expect gold to trade close to our near-term target of $1300/toz until the end of this year when our economists expect economic data to begin to show some confirmation of the economic improvement embedded in the 2014 US outlook.”
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