Strategic analyst at Mitsui Precious Metals explains his outlook for the gold market.
David Jollie is a veteran strategic analyst at Mitsui Precious Metals in London and covers all the precious metals globally for the company. His focus is not short-term price movements but more long term, and some medium trends as well as supply-and-demand issues. HAI’s Sumit Roy recently spoke with Jollie and tapped his insight for a look into the gold market.
HAI: After surging in anticipation of the Fed’s QE3, gold prices haven't done much. Some expected better performance from the metal. Is this merely a temporary pause or have prices topped out?
David Jollie: First of all, you have to think about what the impact of QE is, and there are a whole range of different ways QE works. It makes people worry about inflation in the future, it makes more money available to invest, and it does a whole range of other things as well.
The different phases of QE work different ways. If you're looking at an efficient-market hypothesis, the fact that some of these things are going to happen means that just the anticipation of QE is quite bullish for prices, and particularly for gold prices.
Therefore, it’s not a surprise that while QE was being rumored, you saw prices appreciate. The question is how much money is then really released to get extra leverage to invest wherever that might be, whether it’s gold or somewhere else. So people get very excited leading up to the announcement, but then the increased availability of money doesn’t come as quickly as people think. It’s still bullish for the metals, but it takes time for the second part of it—this extra availability of money—to take impact.
Thus, it’s not completely unexpected that the rise in prices might slow down, though it’s somewhat surprising that we didn’t make it to $1800 and that we fell back from there. That technical failure also took a little bit of the energy out of the market as well.
HAI: In the U.S., the dreaded “fiscal cliff” at the end of the year is fast approaching. How do you see that situation playing out and how will it impact gold?
Jollie: The fiscal cliff is a complex concept because there are so many different aspects that have got to be fixed in time to avoid it. It’s entirely possible the U.S. government will avoid some of the issues of the fiscal cliff, but not all of them. But that still leaves confidence low leading up to the end of the year, and potentially the start of next year, and that’s going to lead to a reduction in GDP growth. Even if the fiscal cliff is solved in time, it’s going to lead to some reduction in economic activity compared to what we would have seen otherwise.
What does that mean for gold? Clearly, it’s a risk event. In some ways it’s similar to the debt-ceiling debate from last year, which was very positive for gold. These types of events suggest that perhaps politicians are less able to solve intractable problems than we thought. And that generally would seem pro-inflation in the longer term, and positive for gold.