Gold still in demand, but investors should take profits if rates rise

Gold still in demand, but investors should take profits if rates rise

GOLD SILVER PRICE NEWS ~ Global investor and central-bank demand will support gold prices, underpinned by Asian demand for jewellery in the short- to medium-term, according to Bank Sarasin’s latest Commodity Strategy, “Gold still in demand for the time being”. Bank Sarasin expects gold to trade at USD 1,575 by end-Q3 2011 and USD 1,650 by end-Q2 2012. But Bank Sarasin, which no longer recommends long-term gold exposure, advises investors to watch for sustained interest rate increases. The investors are likely to unwind gold positions in favour of higher yielding assets. Rising production could also pose price risks.

With the European debt crisis showing no signs of abating, and on-going concerns about the US government’s sovereign credit rating, gold prices have continued to rise driven by investor demand. Slowing global economic growth will give gold additional support, as any rate hike, in particular in the USA, seems further in the future, pushing down real yields. At the same time, rising inflation in Europe and the US has raised the spectre of stagflation, again encouraging gold purchases. Central banks, too, have become net buyers of gold, and Bank Sarasin expects this trend to continue.

Jewellery demand is forecast to put a medium-term floor under gold prices. China, in particular, has a strong impact, with jewellery sales up 21% year-on-year (yoy). In China the removal of restrictions on investing in physically-backed gold ETFs is also driving prices. These ETFs are very popular due to high domestic inflation and limited domestic investment opportunities. Meanwhile, jewellery demand in India rose 12% yoy despite a 25% yoy increase in average gold prices, with sales expected to surge during the Indian wedding season in the second- and third-quarters. Together, China and India account for 63% of global demand for gold jewellery and thus are important market drivers.

Eliane Tanner, Commodity Strategist said: “We expect investment demand to remain robust in the coming months, supported by jewellery demand in emerging markets, particularly China and India. But investors need to keep a watchful eye on interest rates. A sustained rise will see investors unwind their gold positions in favour of higher yielding assets, so we no longer recommend long-term gold exposure. Investors should be ready to take profits on a reversal in interest rates. That could be as early as mid-2012.” Read More