Can bullion hold on to its recovery?

The month of October made history due to the US Federal Government shutdown that stretched for 16 consecutive days. Not that it was a completely new phenomenon, but the fact that this was another shut-down after a 17-year period makes October 2013 unforgettable.

Victor Makanda

Financial markets, mostly equities and currencies, particularly the greenback, took a dip on the news and later recovered after the government reopened on October 17.

Gold nonetheless found support in the pre-shutdown and post-shutdown phase and appears to be headed for a positive monthly gain after a 4,2% loss in September.

At the time of writing, gold stood near its five-week high of US$1 352,9 an ounce, representing a 1,1% gain since the beginning of October.

Most market watchers are now concerned with the sustainability of bullion’s recovery. Is this recovery sustainable going forward or just another dead-cat bounce?

Gold prices have largely been volatile, particularly this year, with economists predicting the 12-year bull-run for the metal has come to an end. That having been said, the current facts on the ground may be a boom for the precious metal in the short-term — a period of not more than 12 months. Firstly, the US Congress only adopted temporary fixes which led to the re-opening of federal government ministries and the avoidance of debt default.

However, wide differences still separate Democrats and Republicans on spending and taxes, which may result in the January 15,2014 deadline for a new deal being missed, possibly leading to another shutdown. The same is also true for the raising of the debt ceiling, where February 7, 2014 has been set. Assuming no deal will be unlocked, the threat of default rises, which supports gold as a safe haven investment.

In addition, the US quantitative easing (QE) debate took another turn following the shutdown. The world’s largest economy is estimated to have lost US$24billion or 0.6% of its gross domestic product (GDP) during this period. Furthermore, the September jobs report was not encouraging despite unemployment falling to 7,2% from 7,3% in the previous month.

Employers added just 148 000 jobs in September compared with 169 000 jobs from August. Economists expected 180 000 jobs to be added. The temporary layoffs during the shutdown are also expected to depress October’s job gain.

The soft employment data has pointed to a dim recovery of the US economy, which favours delayed tapering of the US$85 billion month stimulus programme.

Over and above the possibility of QE being extended, most market watchers believe that no major policy changes will be adopted till Janet Yellen takes over from Ben Bernanke’s eight-year run at the Federal Reserve.

Gold has since found support after US President Barack Obama nominated Janet Yellen as the next chairperson to succeed Bernanke, whose term of office expires early next year.

It is believed that Janet Yellen is a strong advocate of the quantitative easing programme and is likely to maintain that trend unless the recovery in the economy quickens, which looks highly unlikely.

Economic developments, not only in the US but at a global economy level, also suggest a sluggish recovery. In its latest October global economic snapshot, the International Monetary Fund (IMF) cut the world global growth forecast by 0,2% for both 2013 and 2014 to 3,1% and 3,9%, respectively.

This was the sixth straight time in less than two years that global growth projections have been trimmed. The multilateral lender cited sluggish expansion in the developing world, weakness in the US expansion, together with the Euro zone debt crisis as the reasons for the downgrade.

Worth noting from the IMF report was the recommendation for a clear and not haphazard end of the US’ QE programme. The recommendation was premised on the fact that most economies were heavily dependent on capital inflows from the US, hence a slowdown or an end to the QE programme would not support global growth. Assuming these calls are heeded by policymakers, which is highly likely, gold may continue firming as QE has been the major stimulus to bullion prices.

Rising geo-political tensions, mainly in the Middle East and North Africa region, have also supported gold prices for the greater part of this year.

A case in point was the civil unrest in Syria after the alleged chemical weapons attack on civilians in the month of August. What is clear from events in these countries is that the end of war is still far away, which is likely to boost bullion’s outlook.

While proffering direction for gold prices may be difficult, what is clear though is the fact that the above-mentioned key factors could support firm gold prices in the short- term. The demand by most central banks in emerging market economies for the metal as a way of diversifying from reserve currencies such as the dollar and euro also favours the metal.

Overall, assuming financial markets have already priced these factors into current gold prices, then any recovery in prices may only be short-lived.

Assuming gold does recover some ground, Zimbabwe’s export earnings would also be lifted as gold is a significant contributor. Most local gold miners have however failed to ride on the metal’s 12-year run, mainly due to undercapitalisation of their operations. The gain in momentum in implementing the empowerment regulations does not make the situation any more promising.

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