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Is Gold's Long-Term Story Still Intact?


Analysts and asset allocators continue to emphasize the metal's attractions.

While gold dropped to a two-year low earlier this week, many market commentators continue to believe in the metal's long-term fundamentals – although some are taking a more cautious approach in the short-term.

Following a significant drop at the end of last week, gold futures for June delivery fell more than 9% on Monday to $1,361.10 an ounce on the Comex division of the New York Mercantile Exchange. Gold did rebound nearly 2% on Tuesday.

According to reports, gold prices were led lower on Monday by data that showed worse than expected economic growth out of China, while last week's drop was based on speculation that Cyprus' central bank would unload some of its US$600 million in gold, leading many to worry that other European economies might do the same.

In a note this week, Jeff Wright, managing director, senior metals & mining analyst at Global Hunter Securities explained that he and his team tend to believe that the market can rebound "either due to the realization of an overreaction to market events or lack of true danger to gold and silver."

Still, while he believes in the investment thesis of gold and silver long-term, he is lowering his 2013 and 2014 forecasts for the metal to $1,475 and $1,600 respectively.

"We continue to believe in the longer-term story and rationale for gold, but with a more cautious outlook going forward," explains Wright.

According to the Wall Street Journal, Goldman Sachs also recently cut its forecasts for gold over both the short and long-term, expecting gold to fall to $1,270 by the end of 2014.

But Mike Turner, head of global strategy & asset allocation at Aberdeen Asset Management in the UK notes that while gold is now seen as another risk asset and trades more like other commodities, investors should not forget about the metal's attractions.

"Inflation remains a risk, however distant, and gold remains one of the best insurance policies against this threat. Equally if deflation prevails this brings into question the soundness of fiat money, in particular currencies such as the euro which seems much less stable at the moment and gold represents the best store of value against that prospect. Central banks, particularly in emerging markets, are only just beginning to increase their exposure to gold as they look to diversify away from US treasuries and the US dollar," he explains.

In the wake of gold's recent volatility, the World Gold Council also departed from its usual policy not to comment on price movements in the market, issuing a statement earlier this week to remind investors that "taking a short term view of any asset's performance is fraught with danger."

"We believe that despite the current turbulence, the long term fundamentals of the gold market remain intact. There are many different types of holders and buyers of gold, from investors who buy it as a long-term store of value and preserver of wealth, through to speculative investors who seek points in the market to enter and exit making a trading profit. Any appraisal of the investment market for gold needs to take all of these facets into account," notes Marcus Grubb, the World Gold Council's managing director, investment.

Meanwhile, Edison Investment Research in London is continuing to maintain its gold equity valuations based on a long-term gold price of US $1,676 an ounce for the moment.

The principal risk to its forecast, explains Charles Gibson, director and mining sector head, is in the form of any rise to long-term US interest rates and/or any contraction in the monetary base.

"Given continued lackluster economic growth indicators from the US, Europe, Japan, and significantly, now China, Edison deems this risk to be small," he adds.

Twitter: @helenbnichols
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