What Drives the Price of Gold?

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Investor sentiment is the single most important factor in the gold market, says CPM’s Jeff Christian and at the moment they are looking rather price sensitive.

Investor sentiment is the single most important factor driving gold prices higher or lower, Says CPM Group MD, Jeff Christian. And, it is for this reason that gold prices are likely to move lower this year.

 Christian explains that more than a third of the independent variables that seem to affect gold prices are related to investment demand “and it’s not so much the underlying economic environment as it is investors’ interpretation and sentiments towards the underlying economic environment that are really what’s important.”

In 2012, Christian believes the market saw a greater swing in investor sentiment than what was actually taking place in the economy, “from 2008 to 2011 investors were buying gold hand over fist regardless of the price because tomorrow the euro or the ECB or the dollar or the treasury or the world financial system or my bank in particular could collapse. So, there was price insensitivity in gold buying up until the middle of 2011. People were just buying regardless of the price because they were fearful of an imminent financial catastrophe.

“After September/October 2011 investors were saying maybe what I should be most fearful of is not an imminent financial collapse because quite frankly it hasn’t happened, what I should be fearful of is an extended period of time of very low growth, very high unemployment, very low interest rates and a continued kind of bad economic and financial conditions that we’ve seen over the last five years. Maybe the devil to worry about is the devil that I know and that I have been experiencing over the last five years as opposed to some mythic financial collapse and so you’ve seen investors say, in that kind of environment I still want to own gold and so what do I still want to add to my gold and silver but I don’t have to chase the price higher, I can wait for prices to come back.”

This change in sentiment is likely to result in a lower average gold price in 2013, than was seen in 2012 because, as Christian says, it is the marginal demand, one should be concerned with.

In 2012 investors bought 38m ounces in gold. That’s an enormous amount of gold. It’s probably the fourth largest annual net addition to investor stocks in history but it was 2m ounces less than they bought in 2011 and that decline of 2m ounces in investment demand was enough to ensure that the price of gold, which had risen to $1900 in 2011, only rose to $1800 in 2012. Now I feel like a clod saying only $1800 but it’s $100 below where it was the year before.

We think that the price for gold in the following years could trade down towards $1400 to $1420 over the next couple of years and at that level you’ll see sufficient bargain hunting both by central banks and by private investors that you can see a base establish.

Explaining, “What we saw was in the first couple of months of this year people were behaving as if the financial crises were solved. They weren’t solved, they were just kicked down the road and so you had a very strong stock market for a variety of reasons and you had people backing away from gold and silver and you had people re-investing in the euro and euro government bonds and sovereign bonds and then Cyprus came along and really made people focus on the fact that no, these problems haven’t been solved, they are just not as critical as they seemed a year or a year and a half ago, so some of that euphoria has disappeared and that’s good for gold. It’s going to keep investors interested but we think they will probably be price sensitive.”

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