Price forecast: Q3 11: $1725/oz; Q4 11: $1875/oz; 2012 annual average: $2000/oz
Gold prices tested fresh all-time intraday highs before dipping below $1800/oz this week; however the macro environment has become increasingly Gold favourable with central banks keeping interest rates unchanged, the SNB's (Swiss National Bank’s) decision to limit the strength of the CHF and continued uncertainty surrounding the state of the global economy. Good physical demand has emerged from price dips, and other central banks have announced they will add to their gold reserves. In turn, barring short-term corrections, we remain positive on gold.
Macro environment: POSITIVE
--Our economists note speeches from Chairman Bernanke and President Obama this week suggest further fiscal and monetary stimulus is likely. President Obama this week outlined a $447bn program aimed at boosting job growth.
--The Swiss National Bank introduced a "minimum Swiss franc exchange rate of CHF1.20 against the euro" reducing its appeal as a currency safe haven.
--A number of central banks kept interest rates unchanged this week. Our economists note the ECB's press conference was more "dovish" than expected and see rising risks for a 50bp cut, while EM central banks are removing hikes or moving into easing.
--In our economists view, there are three sources of major risk for the euro area's destiny: 1) Greece; 2) other countries' politics; 3) more general financial market and economic developments.
Investor flows: POSITIVE
--CFTC data for the week ended 6 September show tactical investors increased their exposure to Comex gold for the first time in four weeks. Net fund length rose by 7.4k lots as fresh longs (11.2k lots) offset the establishment of fresh shorts (3.8k lots). Non-commercial positions as a percentage of open ineterst remains at 35%.
--Gold physical ETP holdings edged lower but were mostly stable this week despite volatile prices. Holdings closed the week at 2191 tonnes across the 25 products we track.
--Investor appetite remains robust despite the Shanghai Gold Exchange temporarily increasing trade margins and daily trading limits for its gold forward contract. Trading margins for the gold forward contract will increase to 13% from 12% and daily trading limits from 9% to 10% from 9 September to 13 September.
Fundamentals: POSITIVE
--Official sector appetite remains positive, following Kazakhstan's announcement it would be buying domestic gold production, Bolivia has announced it would buy gold from domestic producers to boost its reserves. As per the WGC statistics, Kazakhstan holds 70.4 tonnes (9.9% of reserves) and Bolivia holds 35.3 tonnes of gold (16.4% of reserves). The countries produced 26 tonnes and 5 tonnes of gold last year, respectively. 29 tonnes of Libya's gold had been sold during April and May to help pay the salaries of civil servants.
--The latest trade data for Turkey shows gold imports rose to 17.1 tonnes in August from 10.5 tonnes in July and 7.6 tonnes in August 2010. Appetite has improved despite record gold prices with year-to-date imports reaching 50.92 tonnes compared to 42.5 tonnes for the full year in 2010.
--Prices have found good support on the downside from physical demand in Asia, and bar premiums in Hong Kong and Singapore have held steady this week. Despite entering the seasonally strong period for demand, jewellery demand in India has been relatively light, and instead demand for coins and bars has seen more interest.
--Despite record prices, South Africa reported its gold output fell 3.5% y/y in July and is down 0.4% y/y for the year to date.
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