Gold Investors May Have Been Smart to Hang Around this May

GRONINGEN – The old adage “sell in May and go away” may not ring quite as true this year as it has in the past, especially not in the gold market. The Northern hemisphere summer looks set to be a rather interesting period on the macro-economic front and, as such, the yellow metal is likely to see some action.

Speaking on Mineweb.com’s Gold Weekly podcast, Bart Melek, head of commodity strategy at TD Securities said that gold continues to be supported rather well by the concerns surrounding the debt crisis in the euro zone as well as the spectre of inflation that is being bolstered by persistently high commodity prices.

And, “if that weren’t enough,” he adds, there are also the problems currently facing the U.S. govenrment, in particular the issue of its debt ceiling and the possibility of a temporary technical default in the U.S.

He says, “All of those factors from a sovereign risk perspective appear to be keeping gold well bid”.

Melek’s view is that over the longer term the U.S dollar is likely to strengthen against the euro, partly because of the regions own problems and partly because the Fed is expected to start signalling “probably sometime in the third quarter that at least they would be switching their tone more towards the hawkish side of the equation.”

“They will likely reverse their ultra-easy monetary policy or start to reverse it at some point, and that could mean that the interest rate spreads between US dollar denominated paper and that of other currencies narrow somewhat.”

However, as a result of this reversal, Melek is expecting a correction to the price of the yellow metal beyond the summer.

This correction is expected because of the assumption that the U.S. will end it quantitative easing programme for the time being this month which will reduce market liquidity.

“With less liquidity out there the volatility for gold, silver and the entire market should move higher – and for any level of risk higher volatilities mean that you will want to have less speculative positions in anything that you’re invested in.

But, he says the correction is likely to be fairly modest.

“We’re calling for an average annual price for 2012 of $1,450 – it’s only slightly lower by historical measures than where we are now.  We expect those prices to peak sometime in the third quarter of this year.  We probably price it above $1,600 but once that monetary policy skews – starts moving towards the hawkish and the momentum from quantitative easing starts abating, we would expect to see gold prices migrate somewhat lower.

Indeed, Melek sees the current floor for the gold price somewhere between $1,000 and $1,200 an ounce not just because of the increased demand but also because of the current level of global cash costs.

Full Article – By Geoff Candy

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