Is Gold Ready To Rebound From Multi-Year Lows?

Gold has experienced sustained and heavy weakness in recent months. The yellow metal fell below the $1,200 per ounce marker for the first time since August 2010 last week, to just above $1,190. And gold has surrendered more than 28% since the turn of the year, and almost 15% since the start of the month.

But I believe that recent weakness could present fresh opportunity due to enduring macroeconomic issues. Investors looking to ride this train can cash in by buying SPDR Gold Trust (NYSE: GLD.US) and Gold Bullion Securities (LSE: GBS), exchange-traded products which are designed to follow movements in the gold price.

Precious metal loses lustre following Fed comments…

The metal’s rapid descent last week prompted another flurry of broker downgrades, and Goldman Sachs slashed its forecasts for both this year and next. Goldman analysts now expect the yellow metal to finish the year at $1,300 per ounce, down from $1,435 previously predicted.

And weakness is expected to accelerate into 2014, with an estimate of $1,050 per ounce drawn up for the end of next year, down markedly from the former prediction of $1,270.

The broker noted that “improving economic activity and a less accommodative monetary policy stance” by the US Federal Reserve should push gold lower. Central bank chief Ben Bernanke has hinted on numerous occasions that the bank could begin scaling back bond purchases later this year as the domestic economy improves.

… but long-term drivers remain in place

However, question marks still hang over the timing of any policy tightening across the Atlantic. Bernanke’s growth projections remain the subject of much conjecture, while a number of Federal Reserve members — such as San Francisco Fed boss John Williams just last Friday — have warned against a premature silencing of the printing presses.

Meanwhile, the super-accommodative policies of the Bank of Japan, combined with the possibility of further action by the European Central Bank and Bank of England, means that the potential for fresh waves of liquidity flooding the globe — a supportive phenomenon for gold prices — remains very much on the boil.

Uncertainty over the state of the global economy since the 2008/09 banking crisis has turbocharged gold’s bull run, and many fundamental problems still need to be addressed.

Fears over sovereign debt contagion in the eurozone hit the headlines again this month as the troika announced it was suspending talks with bailed-out Greece. Forthcoming general elections in Germany could exacerbate tensions between European politicians and the European Central Bank on a long term solution to the crisis, while on the ground economic conditions continue to deteriorate. Allied to this, concerns over a cooling Chinese economy could prompt renewed inflows into safe-haven gold.

The world’s central banks continue to stock up on gold, as the threat of galloping inflation and fresh economic jitters prompt them to diversify away from traditional paper currencies.

And increasing demand from populations in developing markets, particularly in Asia, should also underpin gold prices — metal purchases in India hit a monthly record above 160 tonnes in May, for example, prompting the government there to introduce yet more measures to curb buying, such as increased import duty.

Although gold’s near-term price outlook remains broadly uncertain, I believe that there are a number of bullish factors that could limit the downside for gold and indeed push prices higher again over a longer time horizon.

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> Royston does not own shares in any company mentioned here.