Why Gold Looks Set To Burst To $1,500/oz By The Spring

Royston Wild looks at why gold is poised for a strong near-term recovery.

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Gold prices have failed to halt the relentless slide seen since the start of the year, the effect of improving investor sentiment and rising real interest rates squeezing appetite for the safe-haven asset.

Still, the metal has been touted in some quarters to stage a significant comeback in the near future as political troubles internationally and in the US ratchet up in the coming months. And bullish investors can latch onto a potential gold-lined ascent by purchasing SPDR Gold Trust (NYSE: GLD.US) and Gold Bullion Securities (LSE: GBS), exchange-traded instruments designed to track movements in the metal price.

Gold primed for fresh rally

Gold has shed more than 23% since the start of the year, and fresh fears of quantitative easing tapering by the US Federal Reserve — combined with a diminishing threat of international military intervention in Syria — have pushed prices lower again in recent weeks following a modest recovery. Indeed, the yellow metal was recently trading just above the critical $1,300 per ounce marker.

However, precious metals consultancy Thomson Reuters GFMS thinks that gold could be on the cusp of a sturdy near-term comeback. The firm noted in its updated Gold Survey 2013 this month that it expects gold to move back towards $1,480 per ounce in the final quarter of the year before marching on towards $1,500 per ounce in the early part of 2014.

GFMS cites escalating political turbulence — in particular in the Middle East — as a key driver of the gold price in coming months. As well, fresh bouts of sparring on Capitol Hill between President Barack Obama and Congress later in the year over a lifting of the debt ceiling is also likely to underpin the metal’s advance, the association noted.

Fed QE reduction already priced in?

Federal Reserve chairman Ben Bernanke is expected by many to announce tapering to the central bank’s gargantuan asset purchase policy later this afternoon, as signs of economic green shoots in the world’s largest economy reduces the need for excessive money printing. The prospect of lower liquidity levels sloshing around has pushed inflation projections, and therefore the price of gold, lower in recent weeks.

However, Bank of America-Merrill Lynch argues that a reduction in the US stimulus plan is already reflected in the gold price. Indeed, ‘tapering to the tune of $10bn-15bn has in our view been priced in,’ the bank argues, adding that ‘if the Fed… tapers by less or delays tapering entirely, gold prices could rally in the short term.’ Such a scenario could prove explosive to the metal’s price prospects.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in SPDR Gold Trust or Gold Bullion Securities.

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