UBS: Gold set for bull run but….

The latest gold forecasts from UK-based UBS investment strategist Joni Teves, open with the sentences: “We think gold has entered a new phase. Gold has likely entered the early stages of the next bull-run.”

Teves goes on to forecast an average gold price for the year of $1,280 (up $55 from the previous forecast), which may look rather less than bullish at first sight given the current gold price in the $1,360s, but points out that the average price this year so far has only been $1,222.  Thus the new average price prediction suggests an H2 average of around $1,340 – conservative but perhaps realistic if gold sticks in the $1,350 – $1,400 range for the remainder of the year.  Indeed Teves comes up with a short term target for the gold price of $1,400 (from a forecast of $1,250 back in April) – much in line with a number of other bank analysts/strategists who have been falling over themselves to predict higher gold prices during the remainder of the year, but have already mostly been overtaken by events.  Few bank analysts though will stick their necks out and come up with truly bullish forecasts and Teves is no exception, although perhaps more positive than some.  But overall her analysis, in our view, remains somewhat on the conservative side.

What one can say about the UBS figure is that at least it is largely slightly upbeat, but hardly suggests a true bull market in gold – yet.  The Brexit vote, with its destabilising effects on global markets, has thrown all these calculations into disarray.  However we would assume there will be another UBS forecast forthcoming in around three months time which will take into account whatever happens to global markets and the economy, and thus the gold price, between now and then.  We would anticipate ourselves that there will be a higher short term forecast forthcoming by then as the current one may well have been already breached.  But that, of course is speculation on our part – just as brokers and investment funds will always tell you prices may go up or down – there’s no certainty in future progress.

On these pages we’ve been pretty good at calling the positive mood for gold year to date and, so far, hugely correct in our advice to UK investors in particular to buy gold ahead of the country’s EU In or Out referendum as insurance.  The drastic drop in the value of the pound, coupled with the rise in the gold price as a direct result has meant that in pound sterling terms such an investment will have paid off enormously – even more if one had invested in gold or silver stocks rather than in the metal itself or gold ETFs.  Others may have moved funds into safe haven currencies like the U.S. dollar, the Swiss Franc, or the Yen and will also have made decent returns, but not nearly as much as in gold or precious metals stocks.

We based our premise at the time on the idea that even if the referendum vote was to Remain, gold would have continued to be a positive investment in any case as, in our view, fundamentals for a continuing increase in price looked positive. Teves picks up on some of these in a similar vein in her gold commentary, noting low/negative real interest rates; a view that the dollar has peaked; and lingering macro risks, with the UK’s vote to leave the EU serving to reinforce these themes.  Indeed she comments that A likely U.S. Fed decision to postpone further interest rate rises until much later this year, if then, will continue to improve key U.S. sentiment.  Even though China is now the main global gold market and its SGE benchmark price setting implementation is beginning to have an important impact, it is still the U.S. and trading on the COMEX which effectively sets the overall gold price trend.

The other big driver of the gold price has, of course, been the massive inflow into the gold ETFs so far this year.  In the U.S. alone the two major gold ETFs – SPDR Gold Shares (GLD) and Blackrock’s much smaller iShares gold Trust (IAU) have between them taken in just a fraction short of an enormous 399 tonnes so far this year. Bloomberg puts the global total in bullion-backed gold ETFs at over 2,000 tonnes – more than the officially reported holdings of the Chinese central bank – with the two big U.S. ETFs holding well over half of this total.  Yesterday GLD took something of a pause in its progress with withdrawals of 0.28 tonnes – in reality a tiny figure after the previous days 28.8 tonnes of purchases.  The figure may just prove to be an adjustment.  But IAU added a large, for it, 1.76 tonnes, so overall the U.S. gold ETFs showed yet another positive day.

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