Gold Monthly Fundamental Forecast May 2012

Outlook and Recommendation

Gold prices slipped from US$1,743 per ounce in February to US$1,674 in March and have languished at US$1,649 to date in April. Prospects in the coming months will depend heavily upon further monetary policy stimulus from the Fed or ECB. Comments from the Fed Chairman on April 25 gave no hint of QE3, though the Fed remains prepared to act, if required. Gold touched an all-time record high of more than US$1,921 on September 9, 2011.

Gold closed April at 1656.65

Gold started the month under pressure and little has changed as April starts the sell-off on the last day of February to $1,702/oz meant Gold prices started March on a weak footing and that led to prices meandering down to a low of around $1,628/oz on 22^nd March. The successful Greek bond swap and introduction of the second tranche of ECB low-interest three year loans to banks (LTRO) have meant that the debt crisis in Europe has been able to take a back seat. Plus generally good data emerging from the US and less saber-rattling over Iran have meant less need for safe havens, at least for now. As a result, Gold prices have pulled back to a lower trading range between $1,612/oz and $1,700/oz as the market consolidates.

Enough risks to keep market buoyant For now, Gold prices seem to be consolidating and despite strong equity markets, investors do not seem to be rotating out of bullion and into other asset classes. In addition, there seems to be good underlying buying interest, which suggests the downside is well supported. Given the ongoing risks the global economy faces in both the short to medium term and the long term, this is not surprising. In the short term the greatest risk to the markets is probably the potential for an escalation in geopolitical tensions over Iran. Although we would be surprised if any military strike happened this side of the US election, a pre-emptive strike could happen at any time and that on its own might well be a strong reason for investors to keep their interest in Gold. Over the medium term, another reason for owning Gold is that it provides an insurance against undesirable events. Although the EU debt crisis has been out of the headlines recently, the problems have not gone away and could flare-up at any time and that could once again undermine confidence in paper money and in the markets. Also although China’s economy seems to be experiencing a soft landing it could be years before it is on track. Gold spent most of April looking for direction.