Don’t be freaked out by the month-long swoon in gold.
CIBC, which has plenty of expertise in mining and commodities, remains very bullish on it, slamming the idea that somehow gold is in a “bubble”, and calling for a price target of $1400 in 2011. Of course, many of the late-stage gold buyers we’ve seen recently probably thought $1400 was a chip-shot by the end of this year, so even this bullish call may be disappointing to them.
Before getting to their reasoning, we’d like to highlight this chart, via PragCap, which also bolsters the case that there’s no gold bubble. Basically, bubbles look a certain way, and gold doesn’t.
Gold has been exhibiting significant correlation to the U.S. dollar, yet we believe other fundamentals will support continued strong performance of the metal, including stronger investment demand, the market’s need for a safe haven investment, and the absence of growing mine supply.
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The rationale for accelerated reactions to dollar-led gold price movement lies in the additional factors contributing to the strength in the metal. Currency movements may be important but they are not the only factor propelling the price of gold. Uncertainty of many factors has led to strong investment demand for the metal as one of the prime drivers to gold price increases. Whereas jewelry demand accounted for about 82% of metal purchases a decade ago, that figure has dropped with investment demand rising to as much as 73% of total demand in some recent quarters. Aside from the safety protection offered by bullion, we suspect that investors have sought to limit volatility within their holdings by diversification into traditionally counter cyclical vehicles such as gold.
The desire for diversification is not limited investors. In ever increasing amounts, Central Bankers have also joined the party that arguably they were responsible for its demise 12 years ago. Whereas back in 1997, there was selling pressure on bullion brought about first by the governments of the Southern Hemisphere (Argentina, Australia), followed by Switzerland, Netherlands and the United Kingdom, now there is net buying taking place among Central Banks. Key among the buying group of late is China and India. We think this trend to broader purchases by Central Banks will continue leading to a new source of demand that hitherto was a source of supply as Central Bank selling intensified at the turn of the millennium.
In the absence of growing mine supply, we anticipate that bullion will continue to perform well over the next few years and possibly longer. Short-term gyrations however will also be the norm and in the past two weeks we have seen what we consider to be a normal (and arguably healthy) correction to the upward phase of a continued long-term bull market for gold.
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