By David Lew
Two months after gold posted the historic high price of $1,227 per ounce, bullion investors have been caught in pains of losing money for every ounce of the yellow metal. On Thursday, gold plunged to its biggest one-day loss in 16 months. The yellow metal fell 4.4% in volatile trade, plunging below $1,060 an ounce.

Is all the bubble talk on gold turning true? Is gold price headed down to $1,000 or below that level in February? That is the question bullion investors and gold analysts are asking these days.

The biggest irony and risk in investing in gold these days is the disastrous predictions that bullion analysts with investment banks have been making all these months. While some analysts have predicted that gold price would skyrocket to an astronomical high of $3,000 to $ 5,000 per ounce in few years, several banks have been consistently predicting a great bull run for gold all these days.

I have been wondering whether the hype on gold price is created by bullion analysts with global banks.

Read now some interesting comments that several investment banks have made on gold recently:

According to Ernst and Young, which employs 144,000 people around the world, gold price will continue to rise in the long-term, reaching as much as $2,500 per ounce within the next two years.

”The underlying factors driving up gold prices remain in play and will continue to do so for some time, meaning that the precious metal will remain an attractive proposition. Gold prices will remain high. The world is not out of trouble and inflationary pressures cannot be ignored,” the investment bank said.

Recently, leading British bank Standard Chartered predicted in its latest Commodities Quarterly report that gold prices will continue to advance, with a particularly strong showing in 2010.

“The increased availability of scrap gold as prices surge to new highs will see gold average $1,300/oz in Q4 2010 – once the dollar resumes its weakening trend,” said Standard Chartered Bank.

It said that anyone with gold investment in their folds is well-positioned for a great future.

Similarly, Commerzbank said recently: “A further gold price increase has to be expected, especially as short-term-oriented market participants are likely to be jumping on the bandwagon.”

Likewise, Africa’s Standard Bank said that households in China have become the world’s No.1 buyers in 2009. “There is still very good physical demand for Gold ahead of [early Feb's] Chinese New Year.”

While several banks have been predicting a boom time for gold, there is one global bank that has been consistently sharp on gold price—HSBC.

Some months back, HSBC announced its gold price forecasts for 2009, 2010 and 2011. The world’s largest financial services group predicted that the yellow metal would average $990 per ounce in 2009.

HSBC also revised its estimate for 2010 from $950 per ounce to $1,100 per ounce, while it now pegs gold at an average of $975 per ounce in 2011.

Globally, banks have been the aggressive traders in gold. Banks view gold as safe assets. Banks lend money to people, if they are ready to pledge their gold for loans. Central Banks are trying to build up gold reserves so that nations’ foreign exchange reserves are stable and secure for the future.

But the only trouble is that when banks begin to predict gold prices, things go haywire in bullion market. Banks predict gold prices according to their whims and fancies. So, it would not be too much to say that banks are, in fact, trying to create the bubble phenomenon in gold, by forecasting gold prices without throwing light on basic fundamentals.

Can the bullion analysts and banks stop predicting gold price? Can the physical gold price go up or down according to the precious metal’s inherent asset and holding value?

Commodity Online

Platinum and palladium had a thrilling start to 2010 on the expectation and then reality of a US-based exchange traded fund, says a report from Fortis Bank Nederland – The Metals Monthly January 2010.

Platinum, trading at just $1,399/oz on 28 December, reached $1,627/oz by 20 January, a rise of 16%. Palladium saw an even more explosive rally, rising from $352.50/oz on 22 December to $462/oz by 20 January, an increase of 28%. This was its highest fixing since July 2008, when the price was coming down from the spike higher caused by South African electricity shortages.

Short term outlook on platinum and palladium

If our projections for ETF demand are correct, we will see more buying in the next few months. This should support prices; however investors will need a compelling story to maintain their interest and so car sales, particularly in the US (for palladium) and Europe (for platinum) will be key. At recent levels a lot of good news from both appears already priced in. Short-term London fix, platinum: $1,475/oz-$1,600/oz, palladium: $400/oz-$475/oz.

What kind of impact will the US ETFs have?

After a nine-month wait, physical metal platinum and palladium exchangetraded funds (ETFs) were launched in the US on 8 January by a subsidiary of UK-based ETF Securities. Trading on NYSE Arca, the two products are called the ETFS Physical Platinum Shares (share code PPLT) and the ETFS Physical Palladium Shares (PALL). In their first 11 days of trading the platinum product acquired 194,000 oz of metal, and the palladium product had just short of 400,000 oz. This compares well to the already existing products, the UK ETF Securities and the Swiss ZKB, which collectively at the end of 2009 held 676,787 oz of platinum and 1,163,302 oz of palladium. But they have been in operation for nearly three years; it took the UK ETFs 40 (for platinum) weeks and more than two years (for palladium) to match the figures that the new US product has already managed. Trading volumes are higher still.

This bore out the confidence of the bulls, who had anticipated the launch of US PGM ETFs to boost the price. The thinking behind this is the larger size of the US domestic investment market, and, more crucially, the experience in gold and silver ETFs, where there are already US products. In gold the three US gold ETFs (SPDR Gold Trust, iShares and ETF Securities) at the end of 2009 held 1,222 tonnes, 2.6 times the holdings of the five European gold ETFs (ETF Securities, ZKB, Gold Bullion Securities – now owned by ETF Securities – Julius Bauer, and Xetra-Gold). In silver, the two US funds (BGI iShares and ETF Securities) hold 9,800t, 3.8 times the holdings of the two European (ZKB and ETF Securities).

If we assume the PGM ETFs do as well relative to their European cousins as the US gold ones have, say an average ratio of 3.2, it would suggest the US ETFs should eventually accumulate 2.2 Moz of platinum and 4 Moz of palladium. Given that annual supply/demand for both metals is around 7 Moz, these are big numbers. But there are reasons to think such estimates are too high. In silver the BGI iShares ETF enjoyed first-mover advantage, being launched a year before the two European ETFs. The ratio in the period all three have been launched has been a smaller, 2.1 times. In gold there was a UK ETF before the US ETF, but the Swiss/German ETFs post-date it, and in 2009 the ratio of inflows was a lower, 2.2 times. Furthermore, in gold there are ETFs outside Europe, which is not the case in PGMs; if we include their offtake over the year the ratio of US/rest of the world is a slightly lower 1.9. Using this ratio we might expect the US fund to eventually hold 1.35 Moz of platinum and 2.3 Moz of palladium.

This is supported by another method of estimating likely US PGM demand, by studying the most successful investment/speculative products that are currently available in the US for all four metals, the futures’ markets on Nymex and Comex. The most obvious measures of size for those markets are open interest – the number of contracts outstanding – or the non-commercial net long position, the standard measure of speculative interest. In terms of ounces, platinum is the smallest, both in terms of open interest and in terms of non-commercial net long. Palladium has volumes 1.4 to 1.5 times bigger, reasonably similar to the ratio of the two PGMs’ ETF holdings (1.7). Gold is between 30 and 45 times larger; silver is between 243 and 564 times bigger.

If we average the two ratios and assume that was to pertain between the US platinum ETF and the existing US gold ETFs, which have 39.2 Moz, then it would imply that the US platinum ETF should see overtake of 1.1 Moz and the palladium ETF 1.5 Moz. If we use the US silver ETFs, which have 31.5 Moz, it would imply 780,554 oz in the platinum ETF and 1.1 Moz in the palladium ETF. This is a lower projection for the PGM ETFs than obtained by our first method of extrapolating from the current European PGM ETFs.

There is a good reason why our first method might overstate likely offtake. US investors can already purchase the UK and Swiss ETFs. Both products have been around for more than two and a half years, giving ample time for investors to become aware of them. So although the ratio of likely US demand to European demand might indeed be about two, some of the likely US demand might have already been satisfied by the European ETFs. Indeed, at the extreme all US demand might be satisfied by the European ETFs; in which case the only impact of the US launch would be in each product’s market share. However this is not that likely – instead we expect the US PGM ETFs will expand the market, for this is what happened in gold. The first gold ETFs were not in the US but Australia and the UK, and these had acquired 57t (50 in the UK, 7 in Australia) by the end of October 2004. In November 2005 the US SPDR ETF was launched; by the end of that year it had 104t, nearly double the previous holdings of the UK/Australian ETF, which fell by just 3t to 54t.

Combining our two methods might suggest an approximation of demand for the US platinum ETF of about 0.9 Moz and for the US palladium ETF 1.2 Moz, but perhaps 200,000 oz and 300,000 oz respectively of that projected demand will already be held in the European ETFs. This might or might not be transferred over in due course, but it means global offtake will be in the order of 1.35 Moz of platinum and 2 Moz of palladium, of which half has already been satisfied. So additional demand caused by the US ETFs will be in the region of 650,000 oz of platinum and 0.9 Moz palladium. This is in essence a doubling of current ETF holdings.

MUMBAI (Commodity Online): Should investors fear a bubble in gold price? No, there is nothing to worry on gold investment and corrections in the price of gold should not be viewed as bubbles that would burst, says the World Gold Council (WGC).

Saying that gold investment demand across the world remains robust, WGC top officials said that suggestions of a gold price ‘bubble’ do not take account of gold’s market fundamentals.

“The gold price has been building steadily for nine consecutive years, ending 2009 25% higher than on 31 December 2008 at US$1087.50/oz. The PM gold fix in London on Monday 1 February, 2010 was US$1086.50/oz,” said Aram Shishmanian, Chief Executive Officer, World Gold Council.

According to him, the sustained break in gold price above the key $1000/oz level came in early September, with record highs being tested repeatedly over the remainder of 2009. “The current trading range should not be regarded as an overnight spike, but the result of a measured rise, supported by favourable and robust gold fundamentals,” he said.

Marcus Grubb, Managing Director, Investment, World Gold Council on gold demand: “Investor flows, more specifically from western markets, have provided a key means of support during the course of the credit crisis as investors sought to diversify their exposures to other assets and protect their wealth against the current ravages of the global economy as well as future market shocks. These western investor flows appear to have remained resilient even as the global economy has shown signs of recovery.

Furthermore, evidence suggests that even the more tactical elements active in the gold market are being firmly driven by positive sentiment toward gold’s fundamentals. Further price support was provided by a progressive recovery in jewellery demand after a pressured first quarter.

“The diversity in gold demand cited above is expected to continue across multiple sectors and geographies. It is this diversity which has helped insulate the precious metal from shocks impacting other assets. More tangible signs of economic recovery in the second half of 2009, especially in developing economies, also continue to provide support to the gold price”.

Aram Shishmanian said on gold supply: “Robust demand should also be viewed in the context of constrained supply. Significant drivers of the gold price were also apparent on the supply side in 2009. Traditionally, central banks have been suppliers of gold, but this is starting to change. Over the course of 2009, the market saw a structural shift in central bank reserve management as western central banks slowed gold sales and developing nations added to their gold reserves. Other factors contributing on the supply side were sizeable pockets of de-hedging activity, although most major producer hedge books have now been unwound, and a reduction in the supply of recycled gold to market from the extremely high levels seen in the first quarter of 2009″.

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