Gold is Heading Back to a Bull Cycle, Nomura Says

By Brendan Conway

March 5, 2014, 10:01 A.M. ET

Analysts at Nomura Securities this morning upgraded their view of precious-metals prices, and the gist of the argument is that the conditions which sent gold’s price tumbling 28% last year appear to have vanished. It’s a familiar theme to close watchers of the niche.

“Like a phoenix regenerating from its ashes, cyclical gold appears set to recover,” write Tyler Broda and six co-authors.

The shift comes with notable increases to gold and silver price forecasts: Nomura now expects gold to sell for $1,335 this year and $1,460 next, up from $1,138 and $1,200, respectively. The firm’s silver view went to $21.52, from $16.25.

So why now? In short, ETF outflows have abated. Hedge funds are no longer panicking. Gold producers reacted to last year’s selloff by curtailing new projects. And real-interest rates don’t seem to be heading anywhere at the moment:

Last year’s shift in the gold market was rapid and the price response substantial. Instead of a multi-year downtrend, with disinvestment putting pressure on prices over time, many of the variables that drive gold prices have already reset to an extent. ETF and COMEX positioning no longer appear to pose the same threat to prices as in 2013. Gold producers have delayed the next phase of growth projects as they work to protect balance sheets. Long-term demand support from Asian nominal income growth, an evolving post-QE macroeconomic environment and lower disinvestment potential move our gold equilibrium model to now expect price increases over the next three years.

The Nomura analysts also have an unorthodox theory about the reason for last year’s selloff in a section entitled, “ETF sell-off or China arbitrage opportunity?”:

Data for 2013 from consultants Thomson Reuters GFMS and the World Gold Council show that western investment demand in physical bars did not fall precipitously as might have been expected when viewing this in co-ordination with the more visible ETF holdings. Physical gold demand in Europe and North America fell from USD 13.4bn in 2012 to USD 11.7bn in 2013, still a drop, but nowhere near the USD 26.9bn swing (from USD 9.6bn in 2012 to USD -17.3bn in 2013) in ETF and OTC figures, and nowhere near negative figures.

That is perplexing because although the historical correlation between these variables is not high, with the magnitude of change in sign we would have expected more of a physical bar sell-off. That adds credence to the growing belief, in our opinion, that the drop in ETF holdings, and the associated net long unwind on the COMEX in 2013, may have been caused, in part, by the arbitrage opportunity that emerged in Chinese pricing versus London pricing through the year. With Chinese stock levels appearing to be more robust, and with the relative starting point for ETF holdings lower (from 85moz at the start of 2013 to 56moz now), the potential for such negative supply swings has far less potential impact than in late 2012.

Interestingly, the Shanghai gold price has recently dipped back to a neutral level. It will be interesting to watch whether we start to see increasing ETF holdings for the first time since the end of 2012.

The answer to that last question: Yes, we are now seeing increased ETF holdings for the first time since the end of 2012.