Gold & Silver Forum - "Gold may run out of steam @ $1000"

Gold may run out of steam at $1000
By Daniel Sacks

With the gold price struggling to hold on to $800 and gold shares appearing increasingly vulnerable after a torrid two months, Daniel Sacks, portfolio manager at Investec Asset Management, looks at the short-term and long-term case for holding gold.

Gold has shown resilience
Why did the gold price fall?

Firstly, the gold price fell on the back of a stronger US dollar against other currencies, including the euro and the yen.

The dollar has gained strength as economic data in ex-US OECD turned decisively weaker at the same time that US data surprised marginally to the upside, albeit relative to weak expectations.

Moreover, recent weakness in oil prices may also be contributing to strength in the dollar, which has traded inversely with the price of oil.

Nonetheless, we remain bullish on the long-term outlook for the gold price. H owever, although gold has no fundamental reason to be correlated with the euro/US$ exchange, it does have a 91pc historical correlation to the movements in the Euro/US$ exchange.

A dollar strengthening from current levels could therefore derail the positive outlook for gold.

We still believe that the dollar will continue to weaken against the emerging currencies which are fundamentally important for the gold market ie: $/Rupee and $/Renminbi, which matter for gold demand, and $/AUD, $/CAD and $/ZAR, which matter for gold's supply.

Gold isn't what it used to beSecondly, just when it looked like fears of systemic financial weakness would drive gold up through $1000/oz, the fall in the oil price saw a number of consequences that undermined the short-term argument for gold as a safe haven: investors became less risk averse, equities moved higher, the dollar regained some strength and commodity prices fell.

Gold shares, meanwhile, have underperformed the falling gold price, as most companies reported poor results showing increased costs and production disappointments.

So what about the short term outlook?

After a six-year bull market, bullion may well be in for a consolidation phase within the $750 - to $1000 band. It should find a floor at around $750 (a price any lower would result in mine closures) but will struggle to hold onto any gains above $1000.

If our assumption is correct, gold equity shares that can show consistent cost savings and improved production targets should be able to show some meaningful earnings growth.

For once, we believe investors should find better performance from gold shares than exchange traded funds, as the mines come to terms with the spiralling cost factor that has hurt them so much in the past.

And over the longer term?

Over the longer term, we remain positive on gold, based on a mix of macro and supply-demand drivers. The forces that have propelled gold for the past 5 years are firmly in place, and policy prescriptions for the credit crisis seem powerfully and uniformly reflationary.

Gold has shown resilience during a period of seasonal slack, while weathering investor profit-taking without material damage.

We believe gold will be well positioned into the final quarter of the year, when fabrication tightens the market.

This does not map directly to gold prices, but prepares the ground for macro catalysts to enter. While these are impossible to forecast, with systemic financial stresses intensifying in the US and spreading to Europe and emerging markets, the probabilities favour gold.

Daniel Sacks, portfolio manager at Investec Asset Management