ETF Securities' Brooks: Negative Consensus on Gold Could Be Wrong

Thursday, 12 Dec 2013 07:32 AM

By Michelle Smith

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Negativity toward gold is almost unanimous. But there's a potential tailrisk in 2014 that could prove the consensus wrong and push gold higher, said Nick Brooks, Head of Research and Investment Strategy at ETF Securities.

Everyone seems to believe that economic growth, is going to be fantastic, interest rates are going to continue rising and the dollar is going to be strong, Brooks told the audience at ETF Securities' Annual Precious Metals Conference.

“A key factor behind this year's 25 percent drop in gold prices is the reversal of the downward trend in real interest rates,” he admitted.

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He said the research team at ETF Securities believes there are limits as to how much further bond yields can move.

Real interest rates have to stay low for years to come because it's a key support for growth.

There are also constraints on the government's ability to handle substantially higher rates. No one is talking about government debt levels anymore, he said.

And though interest rates are important for the gold market, Brooks said there are other factors to consider, such as supply.

This year, investors have offloaded massive amounts of gold from ETFs, reducing the global holdings to 2009 levels, he said.

But “a lot of the selling from ETFs in the United States, is going to refiners to be re-refined to the purity necessary for the Shanghai Gold Exchange, and [it's] sent directly to China.”

A total of 55 percent of global supply is feeding into China, he added.

With gold at the current levels, for many gold miners, it's not economic for them to explore and invest and go further afield and continue to dig for more gold, which means supply reductions are likely within the medium to longer term.

Sentiment is so negative and positioning is so negative. To many commentators, gold is a “slam dunk short,” said Brooks.

“But I would argue that that's sometimes the best time to be looking at an asset, when it's very out of favor.”

ETF Securities doesn't claim to be bullish on gold, he explained. The firm is only expecting modest economic growth next year, and in that environment, gold is not likely to do exceptionally well. But, we don't see much downside for the metal either, Brooks said.

“If you're looking for that wild card, that potential tailrisk in 2014, it's that the US economy doesn't perform as well as everyone thinks, bond yields come off, the dollar weakens, and at that point I think gold has potential to rise very sharply,” he said.

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