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Nomura slashes gold price estimate, sees significant headwinds

Gold could tumble in the next six months due to weak investment demand, suggests the Japanese broker.
Nomura slashes gold price estimate, sees significant headwinds

After last year’s unbridled optimism, gold analysts are now seemingly locked into a race to the bottom in their predictions for the gold price.

US heavyweight Goldmans Sachs chopped its estimate for 2013 by 5% to US$1,787 an ounce and to US$1,200 longer term earlier in the week, but this has been comfortably topped by Nomura.

The Japanese broker today suggested the gold price could go as low as US$1,025 in the next six months, a drop of a third from the current US$1,580 spot level.

It’s a far cry from three months ago, when a third burst of US monetary easing led to predictions gold would hit US1,800, move to US$2,000 and possibly go as high as US$2,500 by the close of 2013.

Few are saying that now, least of all Nomura.

What’s happened is a dive in investment demand, according to the broker,

It estimates total investment demand in gold over the last four years increased to an average US$60.6bn per annum, up from US$12.5bn in the previous four.

Early indications of gold investment are weak so far in 2013 due to the growing confidence in the global economy, low inflation and an increasing doubt over how long the accommodative US monetary policies will continue.

These all add up to significant headwinds to gold investment and the potential for much more downside in the price from current levels, suggests analyst Tyler Broda.

If investment demand does nothing more than mark time, Broda sees an average gold price over the year of US$1,350, but anything worse than that would push prices much lower and possibly down to US$1,025, with the first half seeing the worst of the fall.

Physical demand from China and India could provide some support, but Nomura says this is hard to assess.

Longer-term, Broda is more bullish and still expects higher gold prices driven by central bank buying, unforeseen events and the US fiscal outlook.

Strong demand for jewellery will also help offset the weak investment over time, while supply will be constrained if the miners' switch their focus to boosting returns rather than growth.

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January 04 2012

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