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Can we Expect a Sharp Correction in the Gold Price Before Year end?

A review of the gold price written by Robin Bew, chief economist at HSBC Bank, proposes that the gold price is in danger of entering bubble territory and predicts a sharp correction by year-end. Determinedly, Robin examines the main drivers behind the price over recent months while acknowledging by use of this graph that the price has been on the rise for much of the last decade:

Gold price
Source: The Economist

Courting controversy from a few sides, the bank states there is nothing special about the nature of gold that makes it an ideal safe-haven asset. Were it not for its widely perceived role as just that, gold would behave like most commodities—rising in value during good economic times, when demand for its industrial uses increases. Of course, gold has limited industrial uses and if that were the only source of demand, the price would behave exactly as he suggests.

The problem is this quasi-financial role that gold has — not quite a currency, but treated as if it were. This imparts it with a special status – like all currencies, though, it can rise or fall depending on circumstances. Upon accepting that the world has somewhat arbitrarily assigned gold this role, we must review a number of factors that support gold’s price prior to predicting how these may develop in the year ahead.

First, its safe-haven status, as he points out; since Lehman Brothers collapsed on Sept. 15, 2008, the price of gold has more than doubled. Demand from investors rose from 692 tons in 2007 to 1,200 tons in 2009 and 1,487 tons in 2010, along with demand for other safe-haven assets like US treasuries and the Swiss franc. The yield on all such government debt – US, German, Japanese — has been historically low for much of the last three years with the exception of early 2011, when the community went risk-on and moved out of safe havens and into commodities and other riskier assets.

Recently though, sovereign debt has been very much back in the news and gold has benefited from its safe haven status as the Euro has seemed on the point of collapse and the US government seems unable to reach agreement on budget cuts.

The other major support for gold, which almost runs counter to fears about sovereign debt and another financial crisis, is the fear of inflation. Indeed in 2009/10 many were attracted to gold as a hedge against the potential for rising inflation as the global economies bounced back in an extremely low-interest and loose monetary environment.

HSBC’s opinion is the US will reach a deal that avoids default before Aug. 2 and that European leaders’ decisions this week will paper over the cracks, if not actually solve the indebted positions of Greece, Portugal, Spain and Italy such that they can continue to function within the Euro. The bank does not see any significant risk of a rise in inflation in the early stages of what will be a weak and prolonged recovery phase. They are expecting a gradual US recovery starting later this year and observe that Japan is already returning to some sense of normality after the natural disasters early this year. As interest rates do rise, the attractions of financing investments in gold will be reduced compared to other asset classes. As a result, the bank expects the price of gold to average $1,390/troy ounce in the fourth quarter of 2011 and to fall to $1,000/troy ounce by mid-2013.

Naturally the bank adds caveats that this is based on the recovery occurring as expected and inflation remaining subdued, but on the balance of probabilities — that is how the bank sees the next two years working out. As such, some may question if gold at $1600/oz really represents such great value, or if they would be better off taking profits while they can.

By. Stuart Burns

(www.agmetalminer.com) MetalMiner is the largest metals-related media site in the US according to third party ranking sites. With a preemptive global perspective on the issues, trends, strategies, and trade policies that will impact how you source and/or trade metals and related metals services, MetalMiner provides unique insight, analysis, and tools for buyers, purchasing professionals, and everyone else for whom metals and their related markets matter.




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  • Anonymous on July 29 2011 said:
    wow, this guy is like most 'experts' that don't have a clue about what's going and the reason why precious metals have been rising, and will continue to rise.. it's the fall of the value in the worthless fiat currencies around the world, most notably the US dollar.. gold is much more likely to hit $5k/oz than $1k/oz.. the US dollar is the artificial bubble, not gold or silver.. listen to real experts like Bob Chapman, Ted Anderson, Don McAlvany, Steve Quayle.. not these clowns on the TV or from these soon-to-disappear banks..
  • Anonymous on July 29 2011 said:
    Agree,Gold and silver have been money since recorded history. What economic laws have changed to change that paradigm? None.
  • Anonymous on July 30 2011 said:
    I understand the reason for investing in gold/silver when it comes to fiat currency, but for gold to get to 5k, things will have to get horribly bad. And if it gets that bad, other commodities like food and water, oil/gas, guns/ammo and other necessities will be what is ov value. When there is a food shortage, sitting around with a pocket full of gold isn't going to help. What's going to be more important to a starving man with a hungry family? An oz of gold or a lb of potatoes? Investing in precious metals is great compares to stocks and bonds in times like this, but as things get worse, you need to stop the investing for profitsvand start worrying about survival. The rich have fooled all into buying metals. If it were just about lack of supply that gives it value, why aren't people buying platinum, palladium, and titanium? They've got you all fooled.
  • Anonymous on July 30 2011 said:
    "When there is a food shortage, sitting around with a pocket full of gold isn't going to help."Wrong! Flat out wrong! When there was a food shortage in Zimbabwe, you could only buy food with gold. If you only had paper money, then you starved.http://www.youtube.com/watch?v=7ubJp6rmUYM
  • Anonymous on July 31 2011 said:
    Why HSBC think the US will begin a recovery next year? QE's 1 & 2 haven't helped. Unemployment is expected to rise, and nothing is on the horizon to suggest anything but more of the same. There will be a QE3, maybe a 4. The dollar will continue to lose value & the price of oil and food will rise, which is the only direction in which they can move; simple supply and demand. Congress may cobble together a debt ceiling package, but none of this changes the threat of a bond rating downgrade, hastening the pace at which the dollar loses reserve currency status. For folks who think this is a kooky theory, the IMF and the G20 feel otherwise. It WILL happen, sooner than you think, and the world will be the better for it. The US however will suffer massive devaluation, compounded by point #1. Take a cue from the central banks of the world. Gold IS money. The new reserve currency will be a basket, with gold included.
  • Anonymous on July 31 2011 said:
    Perhaps I should have rewritten my international finance book instead of trying to teach some energy economics. This is because the way the world works at the present time, it might be possible to make cigar store coupons the reserve currency. You see, if there is some doubt, the lies and misunderstandings originating from and círculated by the 'experts' on TV will provide support for any outlandish choice. At the same time I agree that making the new reserve currency a basket (with gold included) might walk, at keast as a temporary measure. This is because I seem to remember hearing a suggestion of that nature in Basel a couple of centuries ago, when the main subject of the discussion was SDRs. Some very heavy hitters soon shot that down, but maybe it was an idea whose time had not arrived.
  • Anonymous on August 01 2011 said:
    I don't particularly intend to give Fred (or anyone else), a halo for a hat :-* , but whenever I come on this site, nowdays, after skimming through the headlines, I look to see what Fred is commenting on and its a ppretty good indicator of an interesting article, (or of a real piece of nonsense that Fred is shooting down in flames...). Just occasionally he gets shot down too, which is also interesting. 8) Never a dull moment on this website...! :lol: One question; what if anything is the relationship between the price of gold and the price of oil? Or should I read one of your textbooks Fred to find the amswer to that. I'm looking forward to getting your energy economics book, when I've come up for air from my current reading. If your textbook writing is anywhere near as enjoyable as your contributions on this site, it should be a good read. :-) ;-)
  • Anonymous on August 01 2011 said:
    The increase in the price of gold should, ceteris paribus, raise the price of oil. Some theory will back this up, but it is too complicated/esoteric to broach here, so I limit this comment to some rough empiricism. If we look at the time series of the price of oil in relation to the price of gold, we see the price of oil (in dollars) rising as the price of gold increases.
  • Anonymous on August 02 2011 said:
    Thanks Fred. Two last questions; is the price of gold rising as a result of actual scarcity, or of perceived scarcity/market forces? I once heard anecdotally that every day a certain Mr Rothschild in the City of London sits down to decide the price of gold for the day. Is there any reality to this and if so how does it work vis a vis the gold market? Thanks.
  • Anonymous on August 08 2011 said:
    Well, Fred, it looks like the theory of higher gold price should equal higher oil price is being knocked firmly on the head for now...
  • Anonymous on August 09 2011 said:
    Philip, true or not it makes sense for OPEC to let the oil price slide until the threat of a real meltdown passes. If the oil price went up now Standard and Poor's might declare the US bankrupt. Where gold is concerned, when I taught in Hong Kong I was told by students and typists and taxi drivers and street hustlers that the gold price was going up, because people who dreamed about buying gold were finally able to go down to their local 7-11 and make their purchases.
  • Anonymous on August 09 2011 said:
    Fred, i get your point about OPEC. But I don't understand your anecdote about HK, gold and 7-11. Maybe I'm just being a bit dim... :-*
  • Anonymous on August 10 2011 said:
    [quote name="Whos going to get gold for me"]"When there is a food shortage, sitting around with a pocket full of gold isn't going to help."Wrong! Flat out wrong! When there was a food shortage in Zimbabwe, you could only buy food with gold. If you only had paper money, then you starved.http://www.youtube.com/watch?v=7ubJp6rmUYM[/quote]No, his point is that you can't buy food with anything if the food doesn't exist. And if it gets to $5k gold, food will probably be scarce due to supply chain disruption.

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