Gold Price Consolidation - Hard Assets Investor

April 15, 2014

Gold prices are stabilizing here, says CPM Group analyst Rohit Savant...

 

ROHIT SAVANT is chief commodity analyst at CPM Group, the New York-based precious metals and commodities consultancy. Here he tells Mike Norman at HardAssetsInvestor how he sees gold prices consolidating now and rising later in 2014.

 

Hard Assets Investor: Looking at gold prices, are we locked into this trading range now for a while?

 

Rohit Savant: We expect prices to sort of consolidate around $1300 over the second and third quarter. Then potentially rise as we head into the fourth quarter and through 2015. We think there was a lot of optimism toward gold in the first quarter. Because I think 2014 started with a lot of optimism about the global economy and things being in extremely good shape. They probably weren't in as good shape as the markets were making it out to be. Markets overreact on either side. So they jumped out of equities and moved into gold, pushing gold prices up, which brought in a lot of short-term investors. Another thing, prices come back down again. So we think basically in the next couple of quarters, you'll probably see a sort of sideways movement in gold prices before they go up again.

 

HAI: So the gold price responds positively to weakness in the economy? Because most people look at it as an inflation hedge.

 

Rohit Savant: Right. Inflation is definitely something that has helped gold prices. But I don't think inflation is an issue any time in the next two or three years, at least, if not more. And so buying it as an inflation hedge, I think the market's kind of priced in the potential for inflation back in late 2010 and 2011, and now they're kind of backing off from that.

 

HAI: So sort of built into your scenario is a view that we're going to see a slowdown in economic activity globally? Rohit Savant: It's not really a slowdown in economic activity. I think what we're going to see, in terms of the global economy, is just muddling through. Muddling through for the next several years. No real strong growth. And there's still a lot of structural problems with the global economy. You still have huge government deficits, trade imbalances. And these things take a lot of time to get results. I think investors know that. You're probably going to see value investors campaigning to add to their gold holdings every time prices come off, which is why we don't expect gold prices to collapse, we think consolidated to a relatively high level. It's the shorter-term investors who really can push gold prices up strongly. I think when they see that gold prices have consolidated, they've reached close to the bottom, you might start seeing them come back into the market.

 

HAI: We've seen lots of demand in recent years from China, India and central banks such as Russia. Are those factors still there, or have they curtailed their buying?

 

Rohit Savant: Physical buying by China and India would continue, we think. China would continue to buy gold in large volumes, at least this year. The rate of growth, we think, would be much slower than what we've seen in the past couple of years. But they would continue to buy gold. There is a possibility that maybe a couple of years out, you might not see this kind of strong growth out of China. You might even see a decline. It's typical of any market to show weakness. And that could potentially hurt gold prices, because a lot of investment demand in the West is based on this strong Chinese demand. But in the short to medium term, we think Chinese would continue buying slower growth rate than before.

 

HAI: We've seen the RMB drop to about a 14-month low against the Dollar. Is this decline in the Chinese currency a factor, in any way, in demand for gold?

 

Rohit Savant: I guess, to some extent, the currency definitely plays a role in demand for gold, a weakening of domestic currency would typically increase the cost of imports into the country. So that would, to some extent, hurt demand. But that said, I think, in the case of China, be less of an issue than, say, in the case of India, where the currency has been hit a lot more strongly.

 

HAI: It's coming back though...

 

Rohit Savant: It's coming back. But it was badly handled. It's still off quite a bit. But it has improved. So in the case of a country like India, that probably pays a much, much larger role. For example, you saw imports in Turkey during the first two months of this year literally collapse compared to, if I'm not wrong, I think they were off by about 75%. So there was like a strong decline in imports from Turkey, which is also a major consumer of gold, and doesn't get as much attention because of this weakness in currency.

 

HAI: As emerging economies modernize, as their monetary systems become more mature, do you think we'll start to see some pullback in gold demand from these places?

 

Rohit Savant: I think in the case of countries like China and India, yes, you might see an increase in demand for paper assets as those economies become more developed. But I also think it's culturally engrained for people in these countries to buy and hold at least some amount of gold. And that's an extremely huge rule of populations in both these countries, where at least they're not going to have access or advisors to give them advice to invest in paper assets. So in most of these cases, what they tend to do is convert their savings into gold. That's what you're seeing, even today. Most of the gold buying comes out of the ruling leaders in these countries.

 

HAI: How does the mining situation look?

 

Rohit Savant: Mine supply actually grew last year. It's growing this year, which comes as a surprise to some people, because prices have come off. Typically, mine supply does not get affected immediately. It usually takes a few years before mine supply starts getting affected. So we have mine supply growing this year as well as next. A lot of new projects came on-stream in the past couple of years. Those projects are going to be ramping up. So mine supply's in good shape. It's secondary supply [aka scrap gold] which is a lot more price-sensitive. We have that coming off. It came off about 17% last year. Would have been much stronger if it weren't for India, where India, secondary supply grew, because the import restrictions used the available supply. And so that was being met by secondary supply. We continue to see a secondary supply decline this year as well. And maybe over the next couple of years, it sort of stabilizes.

 

HAI: All right. Rohit, thanks very much.

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