By Steven Russolillo
- Bloomberg News
Amid all the negative chatter recently surrounding gold — and the big price decline — one firm is sticking to its bullish thesis on the precious metal.
In a note to clients titled “Still plenty of upside for gold,” Julian Jessop, head of commodities research at Capital Economics, reiterated a scenario in which gold could hit $2,000 an ounce. Worries about the Fed curbing its bond-buying efforts earlier than expected as well as Cyprus being the first euro-zone country forced to sell its gold reserves are both overblown, he says.
“The former is a more serious threat, but neither development would necessarily be as negative for the price of gold as the headlines might suggest,” Jessop says.
Gold futures slipped 0.1% to $1,557.20 an ounce Thursday morning after yesterday staging their biggest one-day decline since November Goldman Sachs GS +0.03% yesterday recommended investors close out so-called long positions and start shorting gold. Goldman significantly slashed its 2013 and 2014 gold forecasts.
The precious metal is down 17% since hitting a record settle high of $1,888.70 in August 2011.
Even so, Jessop explains why he thinks investors are overreacting to worries that the Fed could slow QE in the second half of the year:
“Superficially at least, there has been a close relationship between the size of the US monetary base and the price of gold since 2008. Nonetheless, even if the Fed’s asset purchases are scaled back later this year, the US monetary base is still on course for around $3.5 trillion, which…at face value, would be consistent with a gold price of $2,000 per ounce. What’s more, other major central banks, including the Bank of Japan and the Bank of England, are set to ease further.”
An earlier-than-anticipated end to QE3 could also cause more volatility in financial markets, a prospect that would be good for gold. “This could revive safe-haven demand for gold and limit the downside for prices,” he says.
Regarding Europe, Jessop points to reports suggesting Cyprus may have to sell 400 million euros worth of gold as part of its EU bailout deal.
“This is only part of a draft proposal from the European Commission and may well come to nothing,” Jessop says. “Clearly this would only become a major concern if countries with much larger holdings were forced to sell. However, among the other troubled euro-zone members, only Italy and Portugal hold significant amounts of gold relative to their borrowing requirements.”
If Europe’s debt crisis is truly poised to escalate again and rattle markets, gold could benefit from such a scenario.
“If the crisis elsewhere in the euro-zone escalates to the point where other, larger countries were desperate enough to consider selling their own gold, demand for safe havens would surely be so strong that there would be plenty of willing buyers – even at higher prices,” Jessop says.