Gold Supply Could Restrain Prices - HSBC Securities

The dramatic run-up in gold prices over the last few years is entirely due to investment demand, which has more than made up for weak jewellery demand. But according to Jim Steel, chief commodities analyst at HSBC Securities, the poor jewellery market could actually pose a threat to prices.

In his latest precious metals outlook, Mr. Steel wrote that U.S. dollar weakness and inflation concerns are providing plenty of price support for gold.

Mr. Steel wrote:

Repeated guarantees from Fed officials that, at the appropriate juncture, the central bank will reverse easing policies and thus head off a potential price spiral have, so far, failed to assuage inflation fears.

He also noted that mine supply remains sluggish and reduced sector sales are curtailing supply. It all sounds bullish for gold.

But Mr. Steel is not convinced. He wrote that a surge in recycled gold scrap and poor jewellery demand is freeing up plenty of gold for investors and threatens to restrain rallies. He noted that demand for jewellery is down by double-digit percentages around the world, including key markets like India, as people deal with higher prices and lower disposable incomes. Those same factors are behind the record levels of scrap that are hitting the market this year.

He wrote:

In our view, gold prices will be determined by the interplay of inflation hedging and, to a lesser extent, safe haven buying on the one hand, and weak fabrication demand and the abundance of scrap supplies on the other.

Despite his cautionary words (which are certain to rile the gold bugs), Mr. Steel boosted his gold price forecasts. He is now calling for an average price of $925 an ounce in 2009 (up from his prior forecast of $875), rising to $950 an ounce in 2010. His long-term forecast is $750 an ounce.

Comments

[sdavid0419:]

Despite Mr. Steel writing it or federal officials repeatedly stating it you can't talk away runaway inflation or beat it with WIN buttons either. Completely cutting off the money supply to try to stem the inflation will be a boon for GOLD not a bust.

Aug 07 07:23 AM

[DONE_SONZ:]

That freed up gold will be soaked up.

Aug 07 07:31 AM

[Beach Bubba:]

This guy seems to be hedging his rhetoric bets...Did he just say gold will go up and then it will go down? Duh....isn't that what gold does; it goes up, it goes down....always does and always will. Buy low and sell high.

Aug 07 08:11 AM

[petersl:]

Gold scrap sales have taken a hit according to reports yesterday. I wouldn't be too sure that the gold scrap parties thrown by the victimizers of the uninitiated will continue to yield much downward pressure on gold prices.

Aug 07 09:12 AM

[Screwloose:]

Second-quarter scrap refining was less than half Q1's and supply and demand is less important when it's only a tiny fraction of the above-ground stockpile.

Gold isn't as hard to store as oil and a lot of Asian jewellery should really be seen as ultra-price-sensitive investment demand.

HSBC or JPM jawboning "caution" is actually quite a bullish sign and may indicate that they're running short of ammo; when they are talking gold up - watch out!

With both the US and UK now hopelessly hooked on the deadly "queasing" drug; it may be quite a while - if ever - before gold returns to it's long-term $750 trendline.

Aug 07 10:12 AM

[blacksilver:]

Scrap gold is drying up because the high price brought it all out of hiding,the only scrap now is going to be the new scrap(scrap being made now).Plus the only reason demand of investment gold will drop,is because things are getting better,when that happens jewellery demand will pick up and take up the slack.either way it's going to keep gold at a pretty high price.

Aug 07 10:21 AM

[Trinvester:]

the inflationary concerns in 2010 will obviously leed to gold being pushed higher, $950 could be conservative. but how long is 'long term' for $750? i'll tell my kids to look out for that entry point!

Aug 07 10:37 AM

[Screwloose:]

If you take a monthly-close chart and plot a median [rising] straight line from 2001 to date it finishes up around $750. You could call that line gold's "natural trend value" although it hasn't spent much time on that line as it's been pretty volatile over that period.

Given the ongoing debt meltdown; it's not surprising that gold's trading at a premium to it's "natural value" at present. It's more of a surprise [though no mystery] that it's such a small premium...

For gold to ever see $750 again, the dollar's going to have to make a miraculous recovery - although I wouldn't rule out a temporary dollar rally as things come unglued in the next month or two.


On Aug 07 10:37 AM Trinvester wrote:

> how long is 'long term' for $750?

Aug 07 11:29 AM

[GMiki1:]

What the commenters all just said.

Aug 07 12:16 PM

[Jake2:]

Hard to convince or argue with gold bugs. Most "disinterested" observers now see see gold as less than an interesting investment. All that glitters is not gold, etc. Not even gold.

Aug 08 01:40 AM

[Gonefishenbull:]

I noticed the commentary made no mention of the increase demand in China and India? Guess they figure that will be so minimal it isn't worth mention? Also Runway Inflation will be a great launching pad for gold to the levels some are predicting $3,000 - $5,000 +.

Aug 08 11:06 PM

[nmelendez:]

Funny thing is no one mentions what would happen if dollar collapses to 60 and/or the UAE decides to float oil prices and settle in a myriad of currencies...including gold. People forget, in 2010 the UAE will have it's own Central Bank and currency.

Aug 09 05:33 PM