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Gold prices will remain extremely volatile and occasional big declines may lead many to prematurely declare the death of the bull cycle in gold, according to a US precious metal expert.
“Despite short-term swings, the price of gold is expected to follow a long-term rising trend well into the middle or late years of the decade, supported by such factors as eroding US creditworthiness, concerns over the future of the Euro as a central bank reserve asset, purchases by central banks around the world, and growing demand from China and India,” said American Precious Metal Advisors Managing Director Jeffrey Nichols, who was speaking today in Shenzhen at an investment seminar co-hosted by the Hong Kong Mercantile Exchange (HKMEx) and its member Jinrui Futures.
The seminar, which is part of HKMEx’s continued commitment in the promotion and education of commodities futures trading in the Greater China region, follows the Exchange’s successful Beijing seminar co-hosted with ICBC earlier this year.
“In my view, it is only a matter of time before we see gold break through the US$2,000 an ounce level, probably in the first half of next year, followed by US$3,000, US$4,000, and possibly even US$5,000 or still higher in the middle to late years of the decade,” said Mr Nichols. “Prices much below recent levels may never be seen again. I would be very surprised to see gold dip into three-digit territory to reach below US$1,000 an ounce – ever again.”
Mr Nichols said that failure by the US to rein in federal spending as well as the Federal Reserves’ continually aggressive monetary policies – with the Fed expected to pursue another round of qualitative easing early next year – will result in the resumption in the US dollar’s long-term downtrend. Across the Atlantic, widening disparity between the stronger core economies such as Germany and France and weaker periphery members will further threaten the future of the Euro.
Stronger gold prices will also be fuelled by economic growth in Asia. “In China, since private gold investment was legalised in 2002, rapid growth in household incomes, expanding middle class, and growth in demand for gold as jewellery and for personal savings and investment have all contributed to a rising demand for the yellow metal. And for these same reasons, China’s influence on the future price of gold is likely to continue, if not grow, in the next few years,” Mr Nichols continued.
The demand story is similar in India, traditionally a price-sensitive market for precious metals, but consumers there are ignoring gold price increases and snapping up new supply in expectation of even further price increases. “Longer term, as many of these countries [like China and India] prosper and as their share of global income and wealth continues to increase, they will demand a growing share of the world’s above-ground stock of gold for jewellery, for investment, and for additions to central bank reserves,” Mr Nichols said.
On the supply side, gold mine production, while growing, is not expected to keep pace with the expected growth in global demand. “Even a rash of new mine discoveries would take five to 10 years, or more, to contribute significantly to supply. Meanwhile, existing resources are being depleted, nationalised by unfriendly governments who tend to be not good mine operators, or are simply mined out.”
On the other hand, central banks around the world are switching from net sellers of gold holdings to net buyers, stepping up their purchases of gold as they seek to diversify their official holdings away from US dollars. Gold participation rates are also rising along with growing popularity of new investment vehicles based on gold – such as gold exchange traded funds as well as internet trading platforms that enable retail traders immediate access to the market. All these factors will help to continue to provide support for gold prices in the years ahead, Mr Nichols said.
Meanwhile, Wang Zhaodong, former General Manager at Shanghai Futures Information Technology Co. Ltd., spoke on the development of algorithmic trading in China. He noted that algorithmic trading made up for around 50 percent and 70 percent by volume of transactions conducted on US stock and derivative markets respectively. However, in China only around 15 percent of futures transactions are conducted as algorithmic trades, and made up a small fraction of the country’s stock transactions.
He said that growth of high frequency trading in China is limited by the country’s T+1 settlement practice, slower update of market prices making accurate control of trading hard to realise, as well as less advanced trading systems in use.
Other speakers present today included Chen Dixi, analyst for Jinrui Futures, who spoke on the topic of Cross Market Arbitrage Opportunities, as well as representatives from HKMEx.
HKMEx offers a 32 troy ounces gold futures contract and a 1,000 troy ounces silver futures contract. Both are denominated in US dollars and provide the option for physical delivery in Hong Kong. Other products in the pipeline include a renminbi-denominated gold futures contract, as well as products in other precious metals, base metals such as copper and zinc, agriculture, energy, and commodity indices.
